Wage inequality and skill supplies in a globalised world

We investigate empirically, and explain theoretically, how the relative wages of skilled and unskilled workers vary with their relative supplies in open economies. Our results combine the insights of simple labour market and trade models. In countries that trade, relative wages respond inversely to variation in skill supplies, but the response decreases with the degree of openness to trade and is small in very open countries. To reconcile our results with standard estimates of the elasticity of substitution between skilled and unskilled workers, we allow also for the influence of directed technical change and income elasticity of demand for skill-intensive goods.     

Female labour force participation in an era of organizational and technological change

Abstract The supply of skilled female labour increased significantly at the beginning of the twentieth century as women assumed positions in the newly created clerical workforce. Evidence suggests that despite this increase in labour supply, the wage paid to female clerical workers increased over the period and that the ratio of female clerical wages to male manufacturing wages was roughly constant. These labour market facts can be accounted for in a dynamic general equilibrium model in which an exogenous increase in human capital induces an increase in demand for skilled clerical workers. While induced technological change that favours skilled workers may account for the observed increase in female real wages, explaining the stagnate relative weekly wages paid to female clerical workers requires a framework that includes organizational change.     

Skills,Tasks and the Scarcity of Talent in a Global Economy

The scarcity of talent is a tremendous challenge for firms in the globalized world. This paper investigates the role of labor market imperfection in open economies for the usage of talent in the production process of firms. For this purpose, I set up a heterogeneous firms model, where production consists of a continuum of tasks that differ in complexity. Firms hire low‐skilled and high‐skilled workers to perform these tasks. How firms assign workers to tasks depends on factor prices for the two skill types and the productivity advantage of high‐skilled workers in the performance of complex tasks. I study the firms’ assignment problem under two labor market regimes, which capture the polar cases of fully flexible wages and a binding minimum wage for low‐skilled workers. Since the minimum wage lowers the skill premium, it increases the range of tasks performed by high‐skilled workers, which enhances the stock of knowledge within firms to solve complex tasks and reduces the mass of active firms. In a setting with fully flexible wages trade does not affect the firm‐internal assignment of workers to tasks. On the contrary, if low‐skilled wages are fixed by a minimum wage, trade renders high‐skilled workers a scarce resource and reduces the range of tasks performed by this skill type with negative consequences for the human capital stock within firms. In this case, trade leads to higher per‐capita income for both skill types and thus to higher welfare in the open than in the closed economy, whereas – somewhat counter‐intuitive – inequality between the two skill types decreases, as more low‐skilled workers find employment in the production process.     

Product cycles, endogenous skill acquisition, and wage inequality

Abstract .  This paper presents an endogenous product cycle overlapping generations model, where the supply of skilled labour is endogenously determined. This is used to examine how production shifts through imitation by developing countries affect the domestic wage differential and supply of skilled labour in developed countries. In the model, production shifts increase the demand for researchers in developed countries and cause higher relative wages for skilled labour: this leads to more individuals acquiring the skills. As a consequence, the model helps to explain the simultaneous increase in the domestic wage gap and in the supply of skilled labour observed in developed countries.     

Heterogeneity of imported intermediate inputs and labour: evidence from India’s input tariff liberalization

This article explores whether the nature of imports matters when examining the effects of trade on plant-level labour outcomes. Previous literature that examines this question mainly considers imported intermediate inputs as a homogenous group and is unable to reach a consensus on the effects of input tariff liberalization on employment and wages of skilled and unskilled workers. Exploiting detailed product-level information available on intermediate inputs from plant-level data for the Indian manufacturing sector, I distinguish between plants that import mainly for quality considerations as opposed to plants that seek imports as cheaper alternatives to domestic inputs. I find that strong complementarities exist between skilled workers and imported inputs for plants importing high-quality inputs. For plants importing intermediate inputs mainly as a cost-cutting strategy, input tariff liberalization leads to an increase in employment of both skilled and unskilled workers, but a decline in skill composition. This can best be explained as a strategy that achieves economies of scale. On average, as input tariffs liberalize, importing plants employ more workers and pay higher wages than non-importing plants.     

Immigration Policy,Self‐selection,and the Quality of Immigrants*

This paper investigates the effects of immigration quotas on the average quality of immigrants by developing a human capital migration model where efficiency in migration depends on skills and emigration rates are higher among skilled workers. Studying the joint determination of the domestic level of wages and immigrants' self‐selection, we find a negative relationship between the wage level and the percentage of educated workers among immigrants, which results in a nonstandard downward‐sloping labor supply. In our framework, a higher quota increases the skill mix of immigrants through its negative effect on wages and raises aggregate national income.     

Changes in income distribution and welfare from greater immigration of unskilled workers

This paper considers the consequences of greater immigration of unskilled labor on income distribution and welfare in the receiving country. To address these issues, both the sending and receiving countries are represented in a static general equilibrium model which distinguishes between skilled and unskilled labor and which allows prices to be determined endogenously. In this framework an inflow of unskilled labor is likely to reduce wages of unskilled labor, but whether capital or skilled labor benefits depends upon demand elasticities, elasticities of substitution in production, and differences across countries in the productivity of unskilled labor. National welfare in the receiving country is likely to rise, to the extent that the relative price of importable goods falls, non-residents already in the country receive lower wages, immigrants receive lower wages than those paid to domestic workers, and immigrants cause little increased demand for public services and transfer programs.     

Sector and importer determinants of prices for traded intermediates

While the literature on traded goods prices emphasizes final goods prices and related consumer theory to explain variation in goods prices with importer characteristics, trade in intermediates actually constitutes about two thirds of total trade. We propose a mechanism for explaining variations in the prices of intermediates as a function of importer characteristics, wherein production is vulnerable to failure and the probability of failure declines in the quality of intermediates. Higher wages mean a greater opportunity cost of failure, leading to a stronger demand for high-quality intermediates where firms face higher wages. We find empirical support for this mechanism in the case of intermediate goods using IV regressions. In addition, our findings indicate that while the cost of labour explains about one fifth of variation in imported intermediate prices, it is a non-significant determinant of imported final goods prices.     

Establishment Level Earnings,Technology And The Growth Of Inequality: Evidence From Britain

It is often argued that technical change is responsible for the increase in wage inequality in Britain and the United States in the 1980s and 1990s. In this paper we examine this argument using data from individuals and establishments. It is found that the presence of micro-electronic technologies in workplaces is associated with higher earnings, especially for skilled workers. Decompositions suggest that technical change could have been a cause of the increase in skills premium for highly skilled workers. Nevertheless, our view is that the correlation between wages and plant-level technology is mainly driven by the effect of high wages on the propensity to introduce new technologies rather than vice versa. This view is supported by simultaneous models of the wage-technology relationship.     

Trade and inequality in a directed search model with firm and worker heterogeneity

This paper integrates the insight that exporting firms are typically more productive and employ higher‐skilled workers into a directed search model of the labour market. The model generates a skill premium as well as residual wage inequality among identical workers. A trade liberalization increases the skill premium and likely increases residual inequality among high‐skilled workers. The calibrated model generates results consistent with the prior literature examining the effect of the Canada‐US Free Trade Agreement on the Canadian labour market: a significant decrease in employment in manufacturing, but only a small change in unemployment and wages.     

FOREIGN DIRECT INVESTMENT,NON‐TRADED GOODS AND REAL WAGES

Using a three‐sector general equilibrium model with non‐traded goods, we investigate the impact of foreign direct investment on the real wages of skilled and unskilled workers. We show that foreign direct investment increases the real wages of skilled and unskilled workers alike, but widens the gap between the two under plausible conditions.     

Computers,skills and wages

Computer technology is most prominently used by skilled, high-wage workers. This suggests that computer use requires skills to take full advantage of the possibilities, which are particularly present among relatively skilled workers. This article develops a simple technology adoption model showing that the decision to adopt computer technology depends on (i) the tasks to be performed, (ii) the level of skill or education and (iii) the level of wages. Applying this model to British data, it is shown that the effect of wages and particular tasks on computer adoption is larger than the effect of skills on adoption. The estimates suggest that in Britain computer use is likely to be a matter of cost efficiency and not so much of workers’ skills.     

Age-differentiated minimum wages in developing countries

The fact that minimum wages seem especially binding for young workers has led some countries to adopt age-differentiated minimum wages. We develop a dynamic competitive two-sector labor market model where workers with heterogeneous initial skills gain productivity through experience. We compare two equally binding schemes of single and age-differentiated minimum wages, and find that although differentiated minimum wages result in a more equal distribution of income, such a scheme creates a more unequal distribution of wealth by forcing less skilled workers to remain longer in the uncovered sector. We also show that relaxing minimum wage solely for young workers reduces youth unemployment but harms the less skilled ones.     

Age-differentiated minimum wages in developing countries

The fact that minimum wages seem especially binding for young workers has led some countries to adopt age-differentiated minimum wages. We develop a dynamic competitive two-sector labor market model where workers with heterogeneous initial skills gain productivity through experience. We compare two equally binding schemes of single and age-differentiated minimum wages, and find that although differentiated minimum wages result in a more equal distribution of income, such a scheme creates a more unequal distribution of wealth by forcing less skilled workers to remain longer in the uncovered sector. We also show that relaxing minimum wage solely for young workers reduces youth unemployment but harms the less skilled ones.     

The Supply of Skilled Labour and Skill-biased Technological Progress

This paper presents a model in which the adoption of skill-biased or 'unskilled-biased' technologies is endogenous. In this model of endogenous technology choice, an increase in the supply of skilled labour leads to a temporary fall in the skill premium, followed by an expanding gap between the wages of skilled and unskilled workers as technologies adjust towards the more skill-intensive mix appropriate for the greater skill of the workforce. The adjustment in the technology mix results in slower output growth along the transition path.     

Skills, agglomeration and segmentation

This paper studies the role of skill heterogeneity in “new economic geography” models of location. In our setting, products are both horizontally and vertically differentiated, and producing higher quality goods requires workers with higher skills. Selling to customers based in a different location entails iceberg-type transport costs and additional “communication costs” consisting of a fixed quality loss. We show that the presence of pecuniary externalities creates a mechanism which always promotes spatial sorting of workers according to their skill levels. In particular, in all stable equilibria, workers with higher skill choose to stay in the location where aggregate skill and income is higher, while the less skilled stay in the other.     

A Schumpeterian North–South Growth Model of Trade and Wage Inequality*

The paper presents a dynamic general‐equilibrium model of interindustry North–South trade that is used to analyze the effects of trade liberalization on the Northern wage distribution. Both countries have a low‐tech sector where consumer goods of constant quality are produced by use of unskilled labor. The North also has a high‐tech sector that employs skilled labor and features a quality‐ladder model structure with endogenous growth. Both innovation and skill acquisition rates are endogenously determined. In a balanced trade equilibrium, it is found that Southern‐originated (Northern‐originated) trade liberalization leads to an increase (decrease) in Northern wage inequality both between skilled and unskilled workers and within the group of skilled workers. The endogenous change in the Southern terms of trade determines the direction of change in unskilled wages in both the North and the South.     

Skilled and unskilled wage dynamics in Italy in the 1990s: changes in individual characteristics,institutions, trade and technology

In this paper, we use individual micro data on workers combined with industry and regional data to study the wage dynamics of skilled and unskilled workers in Italy in the 1991–1998 period. In contrast to previous empirical studies, our data make it possible to analyse, within a single framework, the role of many of the factors indicated in the literature as possible determinants of skilled and unskilled wage dynamics: changes in the individual characteristics of workers, changes in labour market institutions, increasing international integration, and skill‐biased technological progress. Our results show that international integration, both in terms of trade in goods and in terms of international labour mobility, plays a role in determining the wage dynamics of skilled (white‐collar) and unskilled (blue‐collar) workers. Moreover, in line with labour economics research, our findings show that the individual characteristics of workers and the institutional variables are more relevant in explaining skilled and unskilled wage dynamics than wage differentials.     

THE MIGRATION MULTILIER

In the presence of sticky wages, the emigration of skilled workers from an area will directly reduce the number of unskilled jobs available. Demand for locally produced and sold goods will consequently fall and this may trigger further rises in unemployment and declines in income.     

Trade, Wages and Unemployment in the Presence of Hiring and Firing Costs

This paper offers a new explanation of the recent Australian wage inequality and unemployment experience. Building on a standard international trade model, it is argued that trade affects wage inequality and unemployment through changes in the bargaining power of different groups of workers in the presence of hiring and firing costs. This allows previously puzzling aspects of the trends to be explained, including the inconsistency of the existing Stolper-Samuelson trade explanation with rising relative skilled wages at the same time as rising skilled labour intensity of production. Considering differences in labour market institutions, in particular hiring and firing costs and minimum wages, allows differences between the experiences of Australia, the USA and Europe to be explained.