Wage inequality, technology, and trade

Journal of International Economic Law, 1998

This paper addresses an issue that has received a great deal of attention in recent years, both from international trade economists and from labor economists: What has caused the relative wage of skilled labor compared to unskilled labor in the United States to increase through the 1980s and 1990s? Prime candidates for causing this change have been "trade" -the increased competition of U.S. workers with unskilled workers abroad -and "technology" -new products and processes that may have increased the productivity of skilled workers or skillintensive industries relative to their unskilled counterparts. The paper reviews what has happened to relative wages and the explanations that have been suggested. A brief look at the empirical evidence from this literature is suggestive, but hardly conclusive. But the paper then asks whether the answer to this question really matters. It turns out that the appropriate policies for dealing with this change in relative wages do not depend on whether the cause of the change has been trade or technology. The paper concludes with an argument about the first-best policy for dealing with the increased wage differential, but also with some skepticism that any policy at all is needed.

Labour Economics, 2011

This paper describes and explains some of the principal trends in the wage and skill distribution in recent decades. There have been sharp increases in wage inequality across the OECD, beginning with the US and UK at the end of the 1970s. A good fraction of this inequality growth is due to technology-related increases in the demand for skilled workers outstripping the growth of their supply. Since the early 1990s, labour markets have become more polarized with jobs in the middle third of the wage distribution shrinking and those in the bottom and top third rising. I argue that this is because computerization complements the most skilled tasks, but substitutes for routine tasks performed by middle wage occupations such as clerks, leaving the demand for the lowest skilled service tasks largely unaffected. Finally, I argue that technology is partly endogenous, for example it has been spurred by trade with China. Thus, trade does matter for changes in the labour market through inducing faster technical change rather than just through the conventional Heckscher-Ohlin mechanism.

The Journal of International Trade & Economic Development, 2016

This paper draws on existing empirical literature and an original theoretical model to argue that technical change does not have to be skill-biased in developing countries. Instead, the extent to which technology adoption in developing countries favors skilled workers depends on a number of factors. Free trade induces technology that favors skilled workers in skill-abundant developing countries and that favors unskilled workers in skill-scarce developing countries, and therefore amplifies the predicted wage effects of trade liberalization. Developing countries experience technical change that is skillbiased when imported skill-biased technologies become relatively cheaper. Increased skill supply further biases technical change in favor of skilled labor. These features aid our understanding of the observed rises in inequality within developing countries, the absence of a significant downward effect of expanded educational attainment on skill premia, and the differential effects of trade liberalization on inequality.

We draw on a dynamical two-sector model and on a calibration exercise to study the impact of a skill-biased technological shock on the growth path and income distribution of a developing economy. The model builds on the theoretical framework developed by and on the idea of localised technological change with sector -level increasing returns to scale. We find that a scenario of catching-up to the high-growth steady state is predictable for those economies starting off with a high enough endowment of skilled workforce. Dur ing the transition phase, if the skill upgrade process for the workforce is relatively slow, the typical inverse-U Kuznets pattern emerges for income inequality in the long run. Small-scale Kuznets curves, driven by sectoral business cycles, may also be de tected in the short run. Conversely, economies initially suffering from significant skill shortages remain trapped in a low-growth steady state. Although the long-term trend is one of decreasing inequality, small-scale Kuznets curves may be detected even i n this case, which may cause problems of observational equivalence between the two scenarios for the policy-maker. The underlying factors of inequality, and the evolution of a more comprehensive measure of inequality than the one normally used, are also analysed. JEL classification numbers: O33, O41. and seminars in Southampton, Trento and Warwick universities for their comments. Usual disclaimers apply.

2010

We estimate the impact of international trade and of trade-induced technological change on the wage inequality in the OECD countries, by estimating a two-stage mandated-wage regression. From our estimation we find no evidence on the Stolper-Samuelson effect of trade with the developing and newly industrialized countries. On the other hand, the evidenced technological change from technological competition did not have

Economic Inquiry, 2004

The relationship between trade liberalization and inequality has received considerable attention in recent years. The primary purpose of this paper is to present new results on the sources of wage inequalities in manufacturing taking into account South-South (S-S) trade. Globalization not only leads to increasing North-South (N-S) trade, but the direction and composition of trade has also changed. More trade is carried out between developing countries. We observe increasing wage inequality is more due to the South-South trade liberalization than to the classical trade liberalization with northern countries. The second purpose is to elucidate the link between the direction of trade and technological change, arguing that it might explain why we obtain different results for South-South trade and North-South trade on wage inequality. A part of this increasing wage inequality due to S-S trade comes from the development of N-S trade relationship in S-S trade which increases wage inequality in middle income developing countries. However the fact that S-S trade is more skill intensive sector oriented increase wage inequality for all developing countries.

2006

Developing countries adopt technologies by purchasing licences from technology leaders. If skilled and unskilled labour are perfect substitutes, we show tehnological change is skill-biased in the South simply because it is in the North, resulting in permanently rising wage inequality in the South. We model expanded educational access as producing relatively educated new cohorts of labour market entrants. This makes the market for skill-biased technologies more attractive, which generates accelerated wage inequality, but this is ultimately a levels e¤ect. Allowing for skilled and unskilled labour to be imperfect substitutes suggests the elasticity of substitution ( ) would have to be far higher for a rise in skill supply to raise wage inequality than for Northern skill-biased technological change to do so. Estimates of suggest expanded educational access is unlikely to increase wage inequality and it is more likely that global technology patterns will do so. The predictions of the mo...

Journal of Economic Surveys, 2008

We review the 'skill-biased technological change (SBTC) versus North-South trade (NST)' debate in order to explain widening wage inequality between skilled and unskilled workers. The traditional explanations based on exogenous SBTC and on the North-South Heckscher-Ohlin-Samuelson approach, as well as the early estimates that diagnosed a clear prevalence of the former, are firstly exposed and discussed. A presentation is then made of the recent theoretical literature that endogenizes SBTC, introduces new channels of impacts from NST, and combines both explanations. Finally, the current estimates show that (i) both explanations are relevant, (ii) their impacts differ according to industries and countries, (iii) outsourcing is the main vector of impact from NST and (iv) SBTC and NST interact. . growing inequalities may be carried out by distinguishing supply factors (education, training, skill obsolescence, migration), institutional factors (changes in unionization, minimum wages and in labour 'flexibility') and demand factors. On the supply side, the educational level of the working population has increased rapidly since the late 1970s in all the advanced countries, except in the USA where its progression has slowed down since the early 1980s. Moreover, if institutional changes, particularly the decline in the minimum wage and the unions' power, have exerted a key impact in such countries as the USA and the UK (Machin, 1997), their influence is not that obvious for all North countries. The economic literature has consequently focused on changes affecting the demand side. Two main explanations have been put forward. The first is based on skill-biased technological change (SBTC), and the second on the impact of NST within a Heckscher-Ohlin-Samuelson (HOS) approach where the 'South' (emerging countries) was characterized by a high endowment of low paid unskilled workers.

The Journal of Developing Areas, 2016

Contrary to the predictions of the 2x2x2 Heckscher-Ohlin model, empirical evidence shows that trade openness causes the skill premium to increase in some developing countries and to decrease in others. This paper introduces a North South setup, where the labor force is divided into skilled and unskilled workers. There are two types of firms: producers of final goods and producers of intermediate goods. There are two types of final goods: a complex good and a simple good. The former is produced utilizing skilled workers, and a range of complex complementary intermediates. The latter is produced utilizing skilled and unskilled workers, and a range of simple complementary intermediates. Complex and simple intermediates are produced by technology monopolists in the North, and used by producers of final goods both in the North and in the South. The results suggest that while the wage gap increases in the North after trade liberalization, the increase in the South depends upon skill acquisition and the subsequent skill bias. The skill premium is the ratio of the weighted average wage of all skilled workers to that of the unskilled workers. The wage of skilled workers is a weighted average of the wage of the skilled workers in the complex sector and in the simple sector. In the South, trade openness causes a decrease in the wage of the former and an increase in the wage of the latter. If the portion of the latter is higher than that of the former, the average wage of skilled workers and the skill premium increase after trade liberalization. Otherwise, the skill premium declines. Therefore, the effect of trade liberalization on the skill premium in the South depends on the level of overeducation.

Open Economies Review, 2008

We use a general equilibrium model of trade to show that technical improvement may indeed cause a fall in the wages of unskilled workers. Under some modest conditions, the wages of skilled workers may go down too. Keywords Non-traded goods • Technical progress and wages JEL Classification F1 • O3 1 However, there are some inconsistencies for developing countries (see Wood 1994, 1997).