Trade Liberalization, Pollution Tax, Skilled Immigration, and Wage Inequality

ABSTRACT This paper constructs a three‐sector Harris–Todaro model to analyze the impact of trade liberalization and the pollution tax on urban unemployment and wage inequality. We find that trade liberalization reduces the urban unemployment rate and alleviates skilled–unskilled wage inequality. Additionally, we show that an increase in the pollution tax raises the urban unemployment rate and widens skilled–unskilled wage inequality. Finally, we demonstrate that a rise in skilled immigration raises the urban unemployment rate and exacerbates skilled–unskilled wage inequality.