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.     

Factor price overshooting with trade liberalization: theory and evidence

This paper develops an intra‐industry trade model with skilled and unskilled labor as factors of production, endogenous accumulation of skilled labor and firm heterogeneity in factor intensities to examine the effect of trade reforms on factor prices. Since exporters are more skill intensive than non–exporters, a decrease in trade barriers initially increases wage inequality between skilled and unskilled workers, as a result of an increase in the relative demand for skilled labor. Over time, however, as agents respond to the change in relative wages by investing in skilled labor, the relative wage of skilled labor decreases. Evidence from Chilean plant–level data supports the idea of factor price overshooting with trade liberalization.     

Trade Liberalization and Wage Inequality: Evidence from India

We evaluate empirically the impact of the dramatic 1991 trade liberalization in India on the industry wage structure. The empirical strategy uses variation in industry wage premiums and trade policy across industries and over time. In contrast to most earlier studies on developing countries, we find a strong, negative, and robust relationship between changes in trade policy and changes in industry wage premiums over time. The results are consistent with liberalization‐induced productivity increases at the firm level, which get passed on to industry wages. We also find that trade liberalization has led to decreased wage inequality between skilled and unskilled workers in India. This is consistent with the magnitude of tariff reductions being relatively larger in sectors with a higher proportion of unskilled workers.     

Trade,Wage Gaps,and Specific Human Capital Accumulation*

We develop a new framework for the analysis of the impact of trade liberalization on the wage structure and on welfare. Our model focuses on the decision of workers to accumulate firm‐specific skills, by “on‐the‐job” training, knowing that this means their future wages will have to be negotiated, and that the outcome of negotiation will depend on the profitability prospect of firms operating in a new trading environment. We show that trade liberalization may reduce the welfare of a developing country because of its adverse effect on skill accumulation. We also explore the effects of trade liberalization on the wage gap between skilled and unskilled workers.     

Globalization,product differentiation,and wage inequality

Abstract This paper develops a two‐country, general equilibrium model of oligopoly in which the degree of horizontal product differentiation is endogenously determined by firms’ strategic investments in product innovation. Consumers seek variety and product innovation is more skill intensive than production. Stronger import competition increases innovation incentives, and thereby the relative demand for skill. An intra‐industry trade expansion following trade liberalization can therefore increase wage inequality between skilled and unskilled workers. As long as some industries remain shielded from international competition, the welfare implications of globalization are found to be generally ambiguous.     

Trade between symmetric countries,heterogeneous firms,and the skill premium

Abstract This paper examines the effects of trade liberalization between symmetric countries on the skill premium. I introduce skilled and unskilled labour in a model of trade with heterogeneous firms à la Melitz (2003) and assume a production technology such that more productive firms are more skill intensive. I show that the effects of trade liberalization on wage inequality crucially depend on the type of trade costs considered and on their initial size. While fixed costs of trade have a potentially non‐monotonic effect on the skill premium, a drop in variable trade costs unambiguously and substantially raises wage inequality.     

Trade liberalization,technology, relative factor supplies and the relative wage: evidence from the South

There is much controversy about the role that trade liberalization, technological change and relative factor supplies have played in bringing about changes in the relative wage of the unskilled workers. Much of the empirical work on this issue has focused on the industrial countries and paid little attention to developing countries. To fill this gap, this study develops a special data set to examine the relative wage behaviour of a large number of developing countries. An empirical model based on the theory is used to test different explanations of the relative wage change. As predicted by the technology explanation, the empirical analysis in the study finds a significant negative link between the relative wage of unskilled workers and the technology index. The analysis, however, does not find a significant role for labour supplies or trade liberalization in determining the relative wage of unskilled–skilled workers.     

Increasing dispersion of skills and rising earnings inequality

In recent decades many countries have simultaneously liberalized their trading regimes and expanded their education systems. The theoretical effect of these regime shifts on the wage differential between skilled and unskilled workers is ambiguous. On the one hand, openness to trade causes demand shifts in the labor market which may widen or narrow the differential. This result depends on whether the unskilled wage is depressed, as in the case of importing countries, or raised, as in the case of exporting countries. On the other hand, an increased supply of more educated workers reduces their wages and narrows the skill wage gap. In this study of the labor market of Hong Kong, we document that recent changes in response to the trade liberalization of Mainland China and expanded access to education have increased the earnings differential between skilled and unskilled workers. Using detailed census data, we argue that the main reason for this outcome is the widened dispersion of skills across the earnings distribution, resulting from demand and supply shifts in the labor market caused by trade openness and expanded access to higher education.     

A Regional Analysis of the Impact of Trade and Foreign Direct Investment on Wages in Mexico, 1984–2000

The conventional Heckscher–Ohlin model of trade predicts an equalizing effect of trade on wages in developing countries abundant in less‐skilled labor. Contrary to these predictions, skill premiums and skill demand increased in Mexico following trade liberalization. “New” trade theories have offered several channels through which trade can increase relative wages and demand for skilled workers. One such channel is foreign direct investment and outsourcing. Using the Mexican Household Income and Expenditure Survey (ENIGH) covering 1984–2000, the author examines the relationship between the demand for skill and maquiladora employment across regions and states. In contrast to previous studies based on manufacturing data for the 1980s, little evidence is found that growth in maquiladora employment is positively related to the increase in relative wages or wage‐bill share of more educated workers.     

Trade Liberalization and the Relative Wages for More-Skilled Workers in Costa Rica

A prominent argument regarding the effects of trade liberalization on the dispersion of wages in LDCs is that trade liberalization should lower the relative demand for more-skilled workers by inducing between-sector shifts towards sectors intensive in unskilled labor. Based on a disaggregating, nonparametric approach that imposes little structure on the data, the paper presents evidence that trade liberalization in Costa Rica led to an increase in relative demand. Other findings are consistent with the "skill-enhancing-trade hypothesis," whereby trade liberalization induces an acceleration of physical capital imports, which raises relative demand through capital–skill complimentarily.     

Extensive and Intensive Margins of Exports and Labor Heterogeneity

This paper investigates how changes in skilled and unskilled labor supply affect different margins of exports. Using bilateral trade data in manufacturing sectors of 34 countries from 1995 to 2010, we find that most of the impact of skilled labor on exports goes through the intensive margin, whereas most of the effect of unskilled labor works through the extensive margin. These outcomes result from the impact of labor skill composition on the productivity cut‐off of exporters. We also find that the impact of skilled and unskilled labor on trade margins depends on the income level of countries and on the type of products. The results indicate that the effect of skilled labor is greater for low‐income countries and differentiated products, while that of unskilled labor is greater for high‐income countries and homogeneous products.     

Trade,environment, and income inequality: An optimal taxation approach

In a small open economy, how should a government pursuing both environmental and redistributive objectives design domestic taxes when redistribution is costly? And how does trade liberalization affect the economy's levels of pollution and inequalities, when taxes are optimally and endogenously adjusted? Using a general equilibrium model under asymmetric information with two goods, two factors (skilled and unskilled labor), and pollution, this paper characterizes the optimal mixed tax system (nonlinear income tax and linear commodity and production taxes/subsidies) with both production and consumption externalities. While optimal income taxes are not directly affected by environmental externalities, conditions are derived under which under‐ or over‐internalization of social marginal damage is optimal for redistributive considerations. Assuming that redistribution operates in favor of the unskilled workers and that the dirty sector is intensive in unskilled labor, simulations suggest that trade liberalization involves a clear trade‐off between the reduction of inequalities and the control of pollution when the source of externality is only production; this is not necessarily true with a consumption externality. Finally, an increase in the willingness to redistribute income toward the unskilled results paradoxically in less pollution and more income inequalities.     

Intra‐industry Trade Liberalization and the Environment

This paper examines how trade liberalization affects national and global pollution in a multi‐country model incorporating monopolistic competition and intra‐industry trade as well as inter‐industry trade. Each country produces skill‐intensive differentiated goods and labor‐intensive goods. Pollution is a by‐product of production but pollution abatement can be undertaken. Regardless of country characteristics, if the differentiated‐good sector is sufficiently cleaner (dirtier) then, without any change in environmental taxes, a multilateral reduction in import protection accorded to the differentiated good or to both goods typically leads to a decline (rise) in pollution in all countries. Pollution havens tend not to arise.     

Labor Training and Foreign Direct Investment

Evidence shows that most foreign direct investment (FDI) flows from developed to developed countries (North–North) in skilled labor‐intensive industries. This paper builds a model that incorporates labor training into the proximity–concentration tradeoffs to analyze the entry mode of multinationals to a foreign country. Production requires both skilled labor and unskilled labor.. A multinational pursuing FDI needs to provide training to some workers in the host country to equip them with skills that are specific to the production of the firm. Labor training and skill specificity lead to contract friction. It is shown that in skilled labor‐intensive industries, FDI increases along with the economic development level of the host country, whereas in unskilled labor‐intensive industries, the reverse is true. This paper provides a theoretical explanation for the empirical findings on the prevalence of North–North FDI in skilled labor‐industries and North–South FDI in unskilled labor‐intensive industries.     

Impact of Chinese growth and trade on labor in developed countries

This paper examines the impacts of growth in China's economy and trade on the skill premium of labor in developed countries. We utilize a unique global dataset that disaggregates workers by occupations to identify impacts across labor categories with different skill sets, complementing the widely used GTAP Data Base in the CGE framework offered by the GTAP model. To study the impacts of China's fast-paced growth, we model the counterfactual, i.e., what if China grew and opened at a more modest rate; we then compare this baseline with China's actual growth. Results indicate that a strong rise in manufacturing exports from China to the US impacts output and employment in the US. The US shifts its production away from light manufacturing sectors to more service-oriented sectors that also tend to engage higher skilled labor. There is a small decrease in the real wages of unskilled labor and a rise in the real wages of skilled labor. Interestingly, not all categories of unskilled labor lose, rather those that are more directly linked with manufacturing sectors are impacted; unskilled ‘service and shop workers’ and the unskilled ‘agricultural workers, machine operators, assemblers, craft workers, and others’ observe a small decline in real wages, while the impact on unskilled ‘clerks’ is insignificant. For all categories of skilled workers, there is an increase in real wages primarily driven by the shift in production to services and high-skilled labor intensive categories, resulting in the rising skill premium. Hence disaggregating the labor data provides greater depth on the understanding of the differential impacts on domestic workers resulting from trade, and thereby guides policy on how these differential impacts can be smoothed through redistribution of benefits. Consistent with other study findings, there is a positive impact on overall growth and welfare in the US, EU and Australasia.     

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.     

Globalization,Worker Mobility and Wage Inequality

In the present paper, I integrate frictional labor markets with on‐the‐job search into an otherwise standard heterogeneous firm model of intra‐industry trade. Most importantly, I show that the returns to workers' inter‐firm mobility are higher in a trade equilibrium than in autarky. Intuitively, by favoring large and productive firms, international trade amplifies the disparities in profitability between small and large firms. Hence, the returns to labor reallocation across firms rise. In view of the empirically observed higher inter‐firm mobility among high‐skill workers, this suggests a skill‐biased impact of trade liberalization.     

Trade, Skills and Adjustment Costs: A Study of Intra-Sectoral Labor Mobility

The relationship between the ability of workers to change job, sector or industry and the short‐run adjustment costs associated with a reallocation of labor is the subject of lively debate among academics. This paper examines recent sector and industry level labor market adjustment in the UK using data from the Quarterly Labour Force Survey. We explore the link between the nature of UK trade patterns and labor adjustment within the manufacturing sector and employ a multinomial logit approach to examine the determinants of “within” and “between” industry mobility. By controlling for individual skill specificity we find some evidence of a link between intra‐industry trade and intra‐industry labor adjustment.     

Cross-Country Externalities of Trade and FDI Liberalization

We develop a three-country heterogeneous-firm model and show that FDI liberalization in one foreign country (F1) results in the following: (i) some firms from the home country switch from export to FDI in F1; (ii) skilled labor’s wage rate drops in the home country; (iii) wage inequality between the skilled and unskilled labor decreases; and (iv) some firms from the home country switch from FDI to export to another foreign country (F2). The effects from trade liberalization are just the opposite, but the effects from education improvement are qualitatively the same as FDI liberalization. The cross-country externalities work through the domestic labor market.     

贸易自由化、有偏的学习效应与发展中国家的工资差异

本文构建了一个模型来研究贸易自由化对熟练劳动力与非熟练劳动力工资差异的影响,从而解释发展中国家工资差异之谜。在贸易自由化之后,发展中国家接触和学习到相对多的与熟练劳动力匹配的技术知识,因此,和生产与非熟练劳动力匹配的技术知识相比,生产与熟练劳动力匹配的技术知识的生产力水平上升相对较多。也就是说,学习效应是有偏的。因为技术知识的生产是熟练劳动力密集型的,所以学习效应会导致对熟练劳动力需求的增加,扩大工资差异。同时,有偏的学习效应会使技术进步更偏向于技能密集型,从而进一步导致对熟练劳动力需求的增加,扩大工资差异。