Globalization, Wage Inequality and Unemployment

Using the assumption that the vertical multinationals ship capital and intermediate goods from parent in Taiwan to subsidiaries in less-developed countries, this paper extends the Harris-Todaro model to analyze the impacts of globalization on wage inequality and unemployment. We find that an increase in the flows of capital from the parent country to the host country decreases the wage inequality of the parent country. In addition, we prove that an increase in the flows of capital discourages the urban unemployment of the parent and host countries.