Trade and Wages: a Deeper Investigation

A new presentation of the specific factors model shows how labor fares under international trade by considering how the price elasticity of the nominal wage rate responds to the terms of trade as well as factor endowments. The key empirical implication is that under a standard assumption about tastes it is straightforward to decompose the gains to labor into measurable terms of trade effects and production bias effects. This provides the basis for suggested time series studies contrasting the specific factors model with the Heckscher–Ohlin model. We then perform a new theoretical analysis of the specific factors model to compare how labor fares under autarky and free trade.