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Abstract

This paper surveys the empirical literature on the effects of growth on inequality in less developed countries, with a particular emphasis on labor market inequality. Existing cross-country studies failed to find a clear link from growth to inequality. Countryspecific studies that focused on labor market inequality have shown that, with a few exceptions, wage inequality increases with growth. This was attributed to increased demand for skilled workers that is accompanied by less-than-sufficient increase in the supply of skilled workers. The increased demand could be due to trade liberalization, labor market liberalization, and/or skill-biased technical change. The paper argues that the methodologies used in many of the empirical applications, designed to investigate changes in labor market inequality in developed economies, should be adjusted to account for the unique properties of labor markets in LDCs. Furthermore, there is merit for a comprehensive study of labor market inequality in many developing countries using a unified methodology.

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