Rural public investment and wage inequality under small‐scale agriculture modernization

Increasing rural public investment is crucial for sustainable rural development and can be an effective approach for reducing inequality. However, wage inequality has increased in some developing countries (e.g., China) after increasing fiscal support. This study explores how rural public investment influences skilled‐unskilled wage inequality by incorporating agricultural modernization in small‐scale agriculture. Agricultural modernization refers to introducing modern non‐agricultural intermediate inputs in agriculture. Owing to the small scale of agriculture, an intermediate sector, the agricultural producer service sector, is required to facilitate this process. We establish a three‐sector general equilibrium model with a two‐layer vertical production structure and investigate the effects of increased public investment in rural areas on the wage inequality between skilled and unskilled labour. The theoretical results show that while more rural public investment raises the wages of both skilled and unskilled labour, it also increases wage inequality. Overall, this study explains why inequality widens as rural public investment increases.