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.