SPECIALIZATION, THE INTERMEDIATE NATURE OF TRADED PRODUCTS AND THE MYTH OF IMPORT DRIVEN WAGE INEQUALITY IN THE UNITED STATES

Abstract.  Using a model that recognises the prevalent cross-country specialization in production and the intermediate nature of all traded products, I investigate the effect of observed trends in the prices of ordinary intermediate and semi-final imports on the expanding wage differential between skilled and unskilled labour in the USA. Contrary to widely accepted stylised facts, my results suggest that decreases in import prices increase both wage rates, while compressing their differential. Sources of wage dispersion are, however, found in skill-biased economy-wide dynamic processes of capital accumulation and technical change.