Globalisation, crime and wage inequality: a theoretical analysis

This study aims to focus on the effects of economic globalisation programme on the problems of criminal activities and on the degree of skilled–unskilled wage inequality.

A competitive general equilibrium model of a small open economy is developed. Unskilled labour moves from the production sector to the criminal sector. Those who join the criminal sector snatch a part of capitalists’ income and skilled workers’ income to finance their consumption and face positive probability of being caught and punished. The size of the criminal sector and the rental rate on capital are simultaneously determined in the short-run equilibrium of this model where factor endowments are exogenously given at a particular point of time.

An increase in the capital endowment resulting from an exogenous foreign capital inflow raises demand for labour and wage rates in both the sectors. So, it lowers the rental rate on capital and thus aggravates the problem of skilled–unskilled wage inequality because the skilled labour using sector is more capital intensive than the other production sector. However, it may lower the size of the criminal sector and thus may raise the level of the gross domestic product.

There exists substantial theoretical works on the problem of skilled–unskilled wage inequality, but none of these works focuses on the general equilibrium allocation of unskilled labour to the criminal sector. On the other hand, existing models specialised to analyse theoretical implications of crime and punishment do not focus on the interaction between crime and wage inequality.