What drives the cross‐country growth and inequality correlation?

Abstract.  We present a neo‐classical model that explores the determinants of growth‐inequality correlation and attempts to reconcile the seemingly conflicting evidence on the nature of the growth‐inequality relationship. The initial distribution of human capital determines the long‐run income distribution and the growth rate by influencing the occupational choice of the agents. The steady‐state proportion of adults that innovates and updates human capital is path dependent. The output elasticity of skilled‐labour, barriers to knowledge spillovers, and the degree of redistribution determine the range of steady‐state equilibria. From a calibration experiment we report that a skill‐intensive technology, low barriers to knowledge spillovers, and high degrees of redistribution characterize the industrial countries with a positive growth‐inequality correlation. A negative correlation between growth and inequality arises for the group of non‐industrial countries with the opposite characteristics. JEL classification: E1, O4     

Goods market responses to trade shocks and trade and wages decompositions

Abstract.  Trade and wages literature asks whether trade or technology has been the major factor behind increases in wage inequality in OECD countries since the 1980s. In this literature, little attention has been paid to how goods market responses to trade shocks affect conclusions. Using an Armington heterogeneous goods trade model we capture demand side effects, and show how trade shocks affecting the price of unskilled‐intensive importable goods can be absorbed on the demand side of goods markets, with little or no impact on relative wage rates. No wage impact occurs if the elasticity of substitution in preferences between imports and import substitutes is one. As this elasticity increases, trade plays an ever larger role in explaining wage inequality changes, and as the elasticity goes below one the sign of the effect changes. We present some results of general equilibrium decompositions of total wage change into trade and technology components using UK data. We suggest that since many import demand elasticity estimates are in the neighbourhood of one, there is a prima facie case that goods market considerations further lower the significance of trade as an explanation of recent trends in OECD wage inequality beyond that claimed in the literature.     

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.     

Gender Inequality and Trade*

The paper empirically explores the international linkages between gender inequality and trade flows of a sample of 92 developed and developing countries. The focus is on comparative advantage in labor‐intensive manufactured goods. The results indicate that gender wage inequality is positively associated with comparative advantage in labor‐intensive goods, i.e. countries with a larger gender wage gap have higher exports of these goods. Also, gender inequality in labor force activity rates and educational attainment rates are negatively linked with comparative advantage in labor‐intensive commodities.     

Economies of Scale, International Capital Mobility, and North-South Inequality

This paper develops a model of North-South trade with a continuum of goods, external economies of scale and international capital mobility. The North-South wage gap must exceed any difference in labor quality for South to overcome the established external economies in North. In equilibrium North retains the goods with the largest external economies and South specializes in the remaining goods. While Northern product innovation leads to the production of additional goods in South, it is possible for South to experience a terms-of-trade deterioration, a reduction in foreign investment, and an increase in wage and income inequality.     

Wage bargaining,trade and growth

We construct a North-South product-cycle model of trade with fully-endogenous growth and union wage bargaining. Economic growth is driven by Northern entrepreneurs who conduct R&D to innovate higher quality products. Northern production technologies can leak to the South upon successful imitation. The North has two sectors: a tradable industrial goods sector (manufacturing) where wages are determined via a bargaining process and a non-tradable sector (services) where wages are flexible. The South has only a tradable industrial goods sector where wages are flexible.We find that unilateral Northern trade liberalization, in the form of lower Northern tariffs on industrial goods, increases the rate of innovation but decreases both the bargained wage in the industrial sector and the flexible wage in the service sector. The wage effects are relative to the Southern wage rate. We also consider a variant of the model with Northern unemployment, driven by a binding minimum wage in the non-tradable service sector. In this case, Northern tariff cuts decrease the innovation rate and the bargained wage rate. In addition, the Northern unemployment rate increases. The model thus highlights the role of labor market institutions in determining the growth and labor market effects of tariff reductions. We also study the effects of unilateral Southern trade liberalization.     

Gradual globalization and inequality between and within countries

Abstract.  This paper investigates the effects of gradual trade liberalization on intra‐country and inter‐country inequality. It assumes two countries, North and South, and two factors, skilled labour and unskilled labour. North is defined as the one that is relatively skilled‐labour abundant and larger. A marginal trade liberalization from autarky is shown to (a) increase (decrease) in skilled‐unskilled wage differential in the North (South) and (b) raise the inequality between North and South. As the global economy approaches free trade, a marginal trade liberalization has effects, which are the opposite of (a) and (b); that is, the relative wage falls in the North and rises in the South, and North‐South inequality decreases.     

Wage inequality and overeducation in a model with efficiency wages

Abstract.  This paper shows that the existence and persistence of 'overeducation' can be explained by an extension of the efficiency wage model. When calibrated to fit the amounts of overeducation found in most empirical studies, the model implies that both the relative wage and the relative employment of high‐skill workers depend inversely on aggregate economic activity. Keeping aggregate employment constant, furthermore, low‐skill unemployment rises, following an increase in the relative supply of high‐skill labour, and relative wages may be insensitive to changes in relative labour supplies. The model may help to explain rising wage inequality in some countries since the early 1970s. JEL classification: J31     

Intellectual property rights and skills accumulation: A product-cycle model of FDI and outsourcing

This study investigates the effects of stronger intellectual property rights (IPR) protection in the South on innovation, skills accumulation, wage inequality, and patterns of production based on a North–South general-equilibrium model with foreign direct investment (FDI) and international outsourcing. We find that stronger Southern IPR protection raises the extent of outsourcing and reduces the extent of FDI. This increases the proportion of unskilled Southerners and mitigates Southern wage inequality. In the North, stronger Southern IPR protection raises the proportion of skilled Northerners and wage inequality. The effects of international specialization, R&D cost, and Northern population are also examined.     

Intellectual property rights, multinational firms and economic growth

This paper develops a model of North-South trade with multinational firms and economic growth in order to analyze formally the effects of stronger intellectual property rights (IPR) protection in developing countries. In the model, Northern firms invent new higher-quality products, multinational firms transfer manufacturing operations to the South and the Southern firms imitate products produced by multinational firms. It is shown that stronger IPR protection in the South (i.e., the adoption and implementation of the TRIPs agreement) leads to a permanent increase in the rate of technology transfer to the South within multinational firms, a permanent increase in R&D employment by Southern affiliates of Northern multinationals, a permanent decrease in the North-South wage gap, and a temporary increase in the Northern innovation rate.     

Indra-Industry Trade,Endogenous Technical Change,Wage Inequality and Welfare

By using alternative intra-industry trade models (1. New goods cannot be introduced into the economy; 2. The possibility for a set of capital goods available in the economy to vary; the models consider the existence of intersectoral linkages), I show by means of Applied General Equilibrium (AGE) analysis that trade rises wage inequality between skilled and unskilled workers; but the impact on wage inequality is far larger, when countries are assumed to exchange differentiated capital goods. The latter result has been obtained by using an imperfect competitive model, which embodies a sector bias technological change that arises from trade. In addition, the gains from trade, insignificant under the standard trade hypotheses, are extraordinarily large when endogenous technological change is taken into account. The main policy conclusion is that if policy makers of flexible wage economies introduce trade barriers to reduce wage inequality, these protective measures, by affecting the diffusion of technology, would cause a large welfare loss. [D58, f12, F43, J3, O3]     

技能型技术进步、南北贸易与工资不平衡

本文试图将技能型技术进步与产业内贸易置于一个框架中对工资不平衡现象进行理论解释。自由贸易通过促使发达国家产品质量阶梯提升型的技术进步而加剧了该国的工资不平衡程度;同时,自由贸易通过促使发展中国家产品种类数增加型的技术进步而加剧了该国的工资不平衡程度。南北贸易在拉大相对工资差距的同时促进了技能型技术进步。     

Technology Transfer,Welfare, and Wage Inequality

We use a linear two‐country, two‐factor, two‐product, two‐different technologies (2×2×2×2) model to study technology transfer and its effects on each country's welfare and factor prices. We demonstrate that technology transfer could benefit both the recipient and the transferring countries. For the recipient country, technology transfer increases the price of the factor that is more intensively used and decreases the price of the other factor. Our results provide an alternative explanation of a trend observed in the past half century: a rise in real wage inequality between relatively skilled workers and less‐skilled workers because of technological progress in numerous countries.     

Learning,experience and the dynamics of north–south Trade and technology transfer

This paper examines the dynamics of learning and experience that underlie technology transfer using a North-South trade model with a continuum of goods. Since North is historically more experienced than South, it initially produces the most advanced goods and pays higher wages. Whenever there is a market-driven transfer of technology and production over time, there will be some wage convergence as South gradually gains experience. Nevertheless, wage inequality must persist in the steady state. Product innovation typically increases steady-state wage inequality because new goods are produced in North, and North ultimately learns than South. [F12, O19]     

Variety-skill complementarity: a simple resolution of the trade-wage inequality anomaly

The Stolper–Samuelson theorem predicts that the relative wage of high-skilled to low-skilled labor will increase in the high-skill abundant US but decrease in low-skill abundant Mexico after trade liberalization, while it actually began to rise in both countries in the late 1980s. We present a simple resolution of this “trade-wage inequality anomaly” in a model of variety trade. Variety trade increases the variety of intermediate goods used by the final good. If the varieties and high-skilled labor are complements, the skill premium rises in both countries. This linking of imports of new foreign varieties—the extensive margin—to wage inequality is compatible with evidence. Our numerical examples illustrate that small amounts of variety trade can produce a significant increase in relative wage.     

International intellectual property rights protection and economic growth with costly transfer

This paper develops a product‐cycle model with costly technology transfer, which requires resources from both the North and the South. In the basic model, we show that strengthening intellectual property rights (IPR) protection induces a large technology transfer and narrows the North–South wage gap. However, we obtain an ambiguous result regarding the effect on economic growth, which depends crucially on the size of the transfer cost. Although strengthening IPR protection induces a high growth rate when the transfer cost is small, it can induce a low growth rate when the transfer cost is large. In the extended model, in order to examine what factors determine the transfer cost, we consider the situation where the Southern firms may misbehave and the Northern firms incur a cost to monitor them. We show that the degree of investor protection and the degree of morality in developing countries influence the size of the transfer cost, which affects economic growth.     

Trade, technology, and unemployment: the role of endogenous skill formation

Abstract .  This paper analyses trade in an asymmetric  2 × 2 × 2  world, where the two countries ('Europe' and 'America') differ in their preferences towards wage inequality. Fair wage considerations compress wage differentials in both countries. European workers are more averse to wage inequality, and Europe is characterized by lower wage differentials and higher unemployment. Allowing for endogenous skill formation, the effects of a globalization shock, global technological change, and a change in the educational capital stock on skill premia and employment levels are derived. In contrast to a model with exogenous factor supplies, international wage and unemployment differentials are affected by global shocks.     

Product variety,finite changes and wage inequality

This paper presents a model with product variety to examine the effects of emigration and capital mobility between the North and the South on production reorganization and two-sided wage inequality. We obtain conditions under which the production patterns in both North and South undergo ‘finite changes’. Overall, the production and trade patterns may be such that the South produces and exports a homogeneous good while the North, a commodity with varieties — the result driven not by technological changes, but by factor mobility. The results further suggest that the wage inequality rises in both countries in conformity with available empirical evidence.     

A note on quantitative trade restrictions, income effects and wage inequality

This paper examines the effects of conversion of one type of physical trade restrictions into another on the intra-country wage inequality in a standard 2 × 2 × 2 Heckscher–Ohlin–Samuelson model. It shows that a conversion of an import-quota into an equivalent voluntary export restraint raises wage-inequality in the country importing the unskilled-labor intensive good and lowers the wage-inequality in its trading partner. This result does not depend on whether the unskilled-labor intensive good or the skilled-labor intensive good was initially subject to an import quota. Conversion of the import-quota into an equivalent import tariff, on the other hand, may lead to a rise in wage inequality in both countries. The driving force behind these results is the real income effect that conversion of one type trade restriction instrument into another results in.     

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.