Rural dual economics, subsidy policy and the income inequality between skilled and unskilled workers*

This paper builds a general-equilibrium model with three sectors to study the effects of several modern-agricultural factor price subsidy policies on the income inequality between skilled and unskilled labour. We find that all types of price subsidies, including on skilled labour, unskilled labour and capital, enlarge the income inequality if capital is sector-specific, while they decrease this gap if capital moves freely between sectors. Moreover, to what extent the income gap would be altered depends on the ratio of factor income to total output, and we also find that the urban unemployment decreases under certain conditions regardless of capital mobility.