In a three-sector general equilibrium model we examine the impact of a partial tax on labour on skilled-unskilled wage inequality. We find that a tax on labour in industrial sector increases skilled-unskilled wage inequality in the short-run, and can have the opposite effect in the long-run. A tax on labour in the services sector reduces skilled-unskilled wage inequality in both the short-run and long-run. Furthermore, introduction of a tax on labour in agricultural sector has no effect on the skilled wage, but reduces the unskilled wage. Accordingly, such a tax increases skilled-unskilled wage inequality in both the short-run and long-run.
International Review of Economics and Finance / Vol. 38, pp.250-257