Skip to main content

International trade, technological change and wage inequality in the UK economy


This paper examines the joint impact of international trade and technological change on UK wages across different skill groups. International trade is measured as changes in product prices and technological change as total factor productivity (TFP) growth. We take account of a multi-sector and multi-factor of production economy and use mandated wage methodology in order to create an well-balanced approach in terms of theoretical and empirical cohesion. We use data from the EU KLEMS database and analyse the impact of both product price changes and TFP changes of 11 UK manufacturing sectors on factor rewards of high-, medium- and low-skilled workers. Results show that real wages of skill groups are significantly driven by the sector bias of price change and TFP growth of several sectors of production. Furthermore, we estimate the share of the three different skill groups on added value for each year from 1970 to 2005. The shares indicate structural change in the UK economy. Results show a structural change owing to decreasing shares of low-skilled workers and increasing shares of medium-skilled and high-skilled workers over the years.

This is a preview of subscription content, access via your institution.

Fig. 1


  1. 1.

    Further examples of factor content methodology are given by Katz and Murphy (1992), Bound and Johnson (1992), Johnson and Stafford (1993) and Berman et al. (1998).

  2. 2.

    Further references concerning mandated wage methodology can be found in Slaughter (2000).

  3. 3.

    For similar results see Berman et al. (1994), Bhagwati and Dehejia (1994) and Lawrence (1996).

  4. 4.

    Further research on the UK wage inequality can be found e.g. in Taylor and Driffield (2005), De Santis (2003), Greenaway et al. (2002) and Acemoglu (2002).

  5. 5.

    For further references see Berndt and Wood (1982) and Morrison Paul (1999).

  6. 6.

    The framework considers only the production side of only one single economy. Thus the model does not imply factor price equalisation along Samuelson (1948). The analysis imposes no assumptions on cross-country similarities or on consumption side.

  7. 7.

    The real wage of high-skilled workers to medium-skilled workers is relatively stable over time which stands in contrast to results based on micro level data.


  1. Acemoglu D (2002) Technical change, inequality, and the labor market. J Econ Lit 40(1):7–72

    Article  Google Scholar 

  2. Attanasio O, Pinelopi G, Pavcnik N (2004) Trade reforms and wage inequality in Columbia. J Dev Econ 74(2):331–366

    Article  Google Scholar 

  3. Baldwin RE, Cain GG (2000) Shifts in relative US wages: the role of trade, technology and factor endowments. Rev Econ Stat 82(4):580–595

    Article  Google Scholar 

  4. Baldwin RE, Hilton RS (1984) A technique for indicating comparative costs and predicting changes in trade ratios. Rev Econ Stat 66:105–110

    Article  Google Scholar 

  5. Berman E, Bound J, Machin S (1998) Implications of skill biased technological change: international evidence. Q J Econ 113(4):1245–1279

    Article  Google Scholar 

  6. Berman E, Bound J, Griliches Z (1994) Changes in the demand for skilled labor within US manufacturing: evidence from the annual survey of manufactures. Q J Econ 109(2):367–397

    Article  Google Scholar 

  7. Berndt E, Wood D (1982) The specification and measurement of technical change in US manufacturing. In: Advances in the economics of energy and resources, vol. 4. JAI Press, pp. 199–221

  8. Bhagwati J, Dehejia VH (1994) Freer trade and wages of the unskilled–is marx striking again? In: Bhagwati J, Kosters M (eds) Trade and wages: leveling wages down?, Ch. 2. Washington, AEI, pp. 36–75

  9. Bound J, Johnson G (1992) Changes in the structure of wages in the 1980’s: an evaluation of alternative explanations. Am Econ Rev 82(3):371–392

    Google Scholar 

  10. Cuyvers L, Stojanovska N (2010) The interplay between international trade and technological change and the wage inequality in the OECD countries. In: FIW working paper, No. 43

  11. De Santis RA (2003) Wage inequality in the United Kingdom: trade and/or technology? World Econ 26:893–909

    Article  Google Scholar 

  12. Desjonqueres T, Machin S, van Reenen J (1999) Another nail in the coffin? Or can the trade based explanation of changing skill structures be resurrected? Scand J Econ 101(4):533–554

    Article  Google Scholar 

  13. Dornbush R, Fischer S, Samuelson PA (1980) Heckscher-Ohlin trade theory with a continuum of goods. Q J Econ 95:203–224

    Article  Google Scholar 

  14. Ethier WJ (1984) Higher dimensional issues in trade theory. In: Jones RW, Kenen PB (eds) Handbook of international economics 1. North Holland, Amsterdam, pp 131–184

    Google Scholar 

  15. EU KLEMS Growth and productivity accounts: March 2008 release, groningen growth and Development Centre,

  16. Feenstra RC, Hanson GH (1999) The impact of outsourcing and high-technology capital on wages: estimates for the United States, 1979–1990. Q J Econ 114(3):907–940

    Article  Google Scholar 

  17. Feenstra RC, Hanson GH (1997) Productivity measurement and the impact of trade and technology on wages: estimates for the US, 1972–1990. NBER working papers, No. 6052, National Bureau of Economic Research

  18. Findlay R, Grubert H (1959) Factor intensities, technological progress and the terms of trade. Oxf Econ Pap 11:111–121

    Google Scholar 

  19. Gosling A, Machin S, Meghir C (2000) The changing distribution of male wages in the UK. Rev Econ Stud 67(4):635–686

    Article  Google Scholar 

  20. Grainger H, Crowther M (2007) Trade union membership 2006. Department of Trade and Industry

  21. Greenaway D, Reed G, Winchester N (2002) Trade and rising wage inequality in the UK: results from a CGE analysis. In: GEP working paper, no. 02/29

  22. Griliches Z (1969) Capital-skill complementarity. Rev Econ Stat 5:465–468

    Article  Google Scholar 

  23. Haskel J, Slaughter MJ (2002) Does the sector bias of skill-biased technical change explain changing skill premia? Eur EconRev 46:1757–1783

    Article  Google Scholar 

  24. Haskel J, Slaughter MJ (2001) Trade, technology and UK wage inequality. Econ J 111:163–187

    Article  Google Scholar 

  25. Johnson G, Stafford F (1993) International competition and real wages. Am Econ Rev 83(2):127–131

    Google Scholar 

  26. Jones RW et al (1971) A three-factor model in theory, trade and history. In: Bhagwati J (ed) Trade, balance of payments and growth: papers in international economics in honour of Charles P. Kindleberger. Amsterdam, North Holland

    Google Scholar 

  27. Jones RW, Scheinkman JA (1977) The relevance of the two-sector production model in trade theory. J Polit Econ 85:909–935

    Article  Google Scholar 

  28. Karoly L, Burtless G (1995) Demographic change, rising earnings inequality, and the distribution of well-being, 1959–1989. Demography 32:379–405

    Article  Google Scholar 

  29. Katz L, Murphy K (1992) Changes in relative wages 1963–1987: supply and demand factors. Q J Econ 107(1):35–78

    Article  Google Scholar 

  30. Lawrence R (1996) Single world, divided nations? International trade and OECD labor markets. The Brookings Institution, Washington

    Google Scholar 

  31. Lawrence R, Slaughter MJ, Hall RE, Davis SJ, Topel RH (1993) International trade and American wages in the 1980s: giant sucking sound or small hiccup? Brookings Pap Econ Act Microecon 1993(2):161–226

    Article  Google Scholar 

  32. Leamer E (1997) In search of Stolper-Samulson effects on U.S. wages. In: Susan Collins (eds.) Imports, Exports and the American Worker, Brookings, pp. 141–214

  33. Levinsohn J (1999) Employment responses to international liberalization in Chile. J Int Econ 47(2):321–344

    Google Scholar 

  34. Machin S, van Reenen J (1998) Technology and changes in skill structure: evidence from seven OECD countries. Q J Econ, MIT Press 113(4):1215–1244

    Google Scholar 

  35. Mayer W (1974) Short and long run equilibria for a small open economy. J Polit Econ 82:955–967

    Article  Google Scholar 

  36. Michaelsen MM (2011) The hidden increase in wage inequality: skill-biased and ability-biased technological change. Ruhr economic papers, no. 0262

  37. Morrison Paul C (1999) Cost structure and the measurement of economic performance: productivity, utilization, cost economics, and related performance indicators. Kluwer Academic Publishers

  38. Murphy K, Welch F (1991) The role of international trade in wage differentials. In: Kosters (ed) Workers and their wages: changing patterns in the US. Washington, AEI, pp. 39–69

  39. Mussa M (1974) Tariffs and the distribution of income: the importance of factor specificity, substitutability and intensity in the short and the long run. J Polit Econ 82:1191–1203

    Article  Google Scholar 

  40. Neary P (1978) Short-run capital specificity and the pure theory of international trade. Econ J 88:488–510

    Article  Google Scholar 

  41. Nelson RR, Phelps ES (1966) Investment in humans, technological diffusion, and economic growth. Am Econ Rev 56:69–75

    Google Scholar 

  42. Neven D, Wyplosz C (1996) Relative prices, trade and restructuring in European industry. CEP discussion paper, no. 1451

  43. Sachs J, Shatz H (1998) International trade and wage inequality in the US: some new results. In: Collins (ed) Imports, exports and the American worker, Ch. 5. Brookings Institution Press, Washington, pp 215–254

  44. Sachs J, Shatz H (1994) Trade and jobs in US manufacturing. Brookings Pap Econ Act 1:1–69

    Article  Google Scholar 

  45. Samuelson P (1948) International trade and the equalisation of factor prices. Econ J 58:163–184

    Article  Google Scholar 

  46. Savin NE, White KJ (1977) The durbin-watson test for serial correlation with extreme sample sizes or many regressors. Econometrica 45:1989–1996

    Article  Google Scholar 

  47. Schmitt J (1996) The changing structure of male earnings in Britain, 1974-88. In: Freeman Richard B, KatzLawrence F (eds) Differences and changes in wage structures. University of Chicago Press and NBER, Chicago, pp 177–204

    Google Scholar 

  48. Slaughter M (2000) What are the results of product price studies and what can we learn from their differences? In: Feenstra RC (ed) The impact of international trade on wages. University of Chicago Press/NBER, Chicago, pp 129–165

    Google Scholar 

  49. Stolper W, Samuelson P (1941) Protection and real wages. Rev Econ Stud 9:58–73

    Article  Google Scholar 

  50. Taylor K, Driffield N (2005) Wage inequality and the role of multinationals: evidence from UK panel data. Labour Econ 12(2):223–249

    Article  Google Scholar 

Download references

Author information



Corresponding author

Correspondence to Sabine Engelmann.

Electronic supplementary material

Below is the link to the electronic supplementary material.

PDF (26 KB)



Cost functions of a two sector and two factor economy

Based on Eq. (5) the factor price ratio of sector 1 reveals as

$$ \frac{w_{1}}{w_{2}}=\frac{\alpha_{11}}{\alpha _{12}}\frac{V_{12}}{V_{11}} $$

and based on Eq. (6) the factor price ratio of sector 2 reveals as

$$ \frac{w_{1}}{w_{2}}=\frac{\alpha_{21}}{\alpha _{22}}\frac{V_{22}}{V_{21}}. $$

Hence, factor intensity of sector 1 is given by

$$ \frac{V_{12}}{V_{11}}=\frac{w_{1}}{w_{2}}\frac{\alpha_{12}}{\alpha _{11}} $$

and of sector 2 by

$$ \frac{V_{22}}{V_{21}}=\frac{w_{1}}{w_{2}}\frac{\alpha_{22}}{\alpha _{21}}. $$

Reinserting factor intensity (35) into (5) yields

$$ \begin{aligned} w_{1} &=p_{1}A_{1}\alpha_{11}\left( \frac{w_{1}}{w_{2}}\frac{\alpha_{12}}{\alpha_{11}}\right)^{\alpha_{12}}\\ w_{2} &=p_{1}A_{1}\alpha_{12}\left( \frac{w_{2}}{w_{1}}\frac{\alpha_{11}}{\alpha_{12}}\right)^{\alpha_{11}}. \end{aligned} $$

Hence, by rearranging, the cost function of sector 1 reveals as

$$ p_{1}=\frac{1}{A_{1}}\frac{w_{1}^{(1-\alpha_{12})}w_{2}^{\alpha _{12}}}{\alpha_{12}^{\alpha_{12}}(1-\alpha_{12})^{(1-\alpha _{12})}}. $$

Reinserting factor intensity (36) into (6) yields

$$ \begin{aligned} w_{1} &=p_{2}A_{2}\alpha_{21}\left( \frac{w_{1}}{w_{2}}\frac{\alpha_{22}}{\alpha_{21}}\right)^{\alpha_{22}} \\ w_{2} &=p_{2}A_{2}\alpha_{22}\left( \frac{w_{2}}{w_{1}}\frac{\alpha_{21}}{\alpha_{22}}\right)^{\alpha_{21}} \end{aligned} $$

Hence, by rearranging, the cost function of sector 2 reveals as

$$ p_{2}=\frac{1}{A_{2}}\frac{w_{2}^{(1-\alpha_{21})}w_{1}^{\alpha _{21}}}{\alpha_{21}^{\alpha_{21}}(1-\alpha_{21})^{(1-\alpha _{21})}}. $$

Determination of factor prices of a two sector and two factor economy

The equation system (8) reveals in matrix notation as

$$ \left( \begin{array}{ll} \alpha_{11} & \alpha_{12} \\ \alpha_{21} & \alpha_{22} \end{array} \right) \left( \begin{array}{l} \ln w_{1} \\ \ln w_{2} \end{array} \right)=\left( \begin{array}{l} \ln \overline{p_{1}} \\ \ln \overline{p_{2}} \end{array} \right). $$

Solving by Cramer’s Rule yields

$$ \begin{aligned} \ln w_{1}=\frac{Det(\underline{\Upphi_{1}})}{Det(\underline{\Upphi })}&=\frac{\ln \overline{p_{1}}\cdot \alpha_{22}-\ln \overline{p_{2}}\cdot \alpha_{12}}{\alpha_{11}\cdot \alpha_{22}-\alpha_{21}\cdot \alpha_{12}}=\frac{\ln\overline{p_{1}}\cdot \Upphi_{11}+\ln \overline{p_{2}}\cdot \Upphi_{21}}{\alpha_{11}\cdot \alpha_{22}-\alpha_{21}\cdot \alpha_{12}} \\ \ln w_{2}=\frac{Det(\underline{\Upphi_{2}})}{Det(\underline{\Upphi })}&=\frac{\ln \overline{p_{2}}\cdot \alpha_{11}-\ln \overline{p_{1}}\cdot \alpha_{21}}{\alpha_{11}\cdot \alpha_{22}-\alpha_{21}\cdot \alpha_{12}}=\frac{\ln\overline{p_{2}}\cdot \Upphi_{22}+\ln \overline{p_{1}}\cdot \Upphi_{12}}{\alpha_{11}\cdot \alpha_{22}-\alpha_{21}\cdot \alpha_{12}} \end{aligned} $$
$$ \begin{aligned} Det(\underline{\Upphi })\cdot \ln w_{1} &=\sum\limits_{i=1}^{2}\Upphi_{i1}\cdot \ln \overline{p_{i}} \\ Det(\underline{\Upphi })\cdot \ln w_{2} &=\sum\limits_{i=1}^{2}\Upphi_{i2}\cdot \ln \overline{p_{i}}, \end{aligned} $$

whereby determinants are given by

$$ \begin{aligned} Det\left( \begin{array}{ll} \alpha_{11} & \alpha_{12} \\ \alpha_{21} & \alpha_{22} \end{array} \right) &=Det(\underline{\Upphi })=\Upphi \\ Det\left( \begin{array}{ll} \ln \overline{p_{1}} & \alpha_{12} \\ \ln \overline{p_{2}} & \alpha_{22} \end{array} \right) &=Det(\underline{\Upphi_{1}}) \\ Det\left( \begin{array}{ll} \alpha_{11} & \ln \overline{p_{1}} \\ \alpha_{21} & \ln \overline{p_{2}} \end{array} \right) &=Det(\underline{\Upphi_{2}}), \end{aligned} $$

with adjoints \(\Upphi_{11}=\alpha_{22}, \Upphi_{21}=-\alpha_{12},\Upphi_{12}=-\alpha_{21}\) and \(\Upphi_{22}=\alpha_{11}.\) Hence, the factor price of the economy reveals for factor 1 as

$$ \begin{aligned} \ln w_{1} &=\frac{1}{Det(\underline{\Upphi })}\sum\limits_{i=1}^{2}\Upphi_{i1}\cdot \ln \overline{p_{i}} \\ &=\sum\limits_{i=1}^{2}\frac{\Upphi_{i1}}{\Upphi }\ln A_{i}+\sum\limits_{i=1}^{2}\frac{\Upphi_{i1}}{\Upphi }\ln p_{i}+\frac{1}{\Upphi }\prod_{1=1}^{2}\left[\prod_{k=1}^{2}\alpha_{ik}^{\alpha_{ik}}\right]^{\Upphi_{i1}} \\ &=\sum\limits_{i=1}^{2}\beta_{i1}\ln A_{i}+\sum\limits_{i=1}^{2}\beta_{i1}\ln p_{i}+\gamma_{1} \end{aligned} $$

and for factor 2 as

$$ \begin{aligned} \ln w_{2} &=\frac{1}{Det(\underline{\Upphi })}\sum\limits_{i=1}^{2}\Upphi_{i2}\cdot \ln \overline{p_{i}} \\ &=\sum\limits_{i=1}^{2}\frac{\Upphi_{i2}}{\Upphi }\ln A_{i}+\sum\limits_{i=1}^{2}\frac{\Upphi_{i2}}{\Upphi }\ln p_{i}+\frac{1}{\Upphi }\prod_{1=1}^{2}\left[\prod_{k=1}^{2}\alpha_{ik}^{\alpha_{ik}}\right]^{\Upphi_{i2}} \\ &=\sum\limits_{i=1}^{2}\beta_{i2}\ln A_{i}+\sum\limits_{i=1}^{2}\beta_{i2}\ln p_{i}+\gamma_{2}. \end{aligned} $$

Cost functions of a M sector and N factor economy

Based on Eq. (15) the factor price ratios reveal as

$$ \frac{w_{k}}{w_{l}}=\frac{\alpha_{ik}}{\alpha _{il}}\frac{V_{il}}{V_{ik}}. $$

Thus, factor intensities are given by

$$ \frac{V_{il}}{V_{ik}}=\frac{w_{k}}{w_{l}}\frac{\alpha_{il}}{\alpha _{ik}}. $$

Reinserting the factor intensities (48) into Eq. (15) yields

$$ w_{k}=p_{i}A_{i}\alpha_{ik}\prod\limits_{j=1}^{n}\left( \frac{w_{k}}{w_{j}}\frac{\alpha_{ij}}{\alpha_{ik}}\right)^{\alpha _{ij}}. $$

With \(\Uppi \alpha_{ik}^{\alpha_{ij}}=\alpha_{ik}^{\Upsigma\alpha_{ij}}=\alpha_{ik}\) and \(\Uppi w_{k}^{\alpha i_{j}}=w_{k}^{\Upsigma \alpha_{ij}}=w_{k}\) the cost functions reveal as

$$ p_{i}=\frac{1}{A_{i}}\prod\limits_{j=1}^{n}\frac{w_{j}^{\alpha _{ij}}}{\alpha_{ij}^{\alpha_{ij}}}. $$

Determination of factor prices of a M sector and N factor economy

With \(\ln w_{j}=\nu_{j}\) and \(\ln \overline{p_{j}}=\eta _{j}\) the system (17) in matrix notation reveals as

$$ \underline{\Upphi}\underline{v}=\underline{\eta }. $$

\(\underline{\Upphi}\) is the matrix with α − components, ν j the unknowns and η j the right hand side. The matrix \(\underline{\Upphi}\) is nonsingular. Solving (51) by Cramer’s Rule yields

$$ \nu_{i}=\frac{1}{Det(\underline{\Upphi})}Det(\underline{\Upphi_{i}}). $$

Using \(\underline{\Upphi}\) and substituting the ith-column by the right hand side of (51), denoting the result \(\underline{\Upphi_{i}}\), it follows for case i = 1

$$ \ln w_{1}=\frac{1}{\det (\underline{\Upphi})}\det \left( \begin{array}{cccc} \ln \overline{p_{1}} & \alpha_{_{12}} &\ldots & \alpha_{_{1n}} \\ \ln \overline{p_{2}} & \alpha_{_{22}} &\ldots & \alpha_{_{2}n} \\ \ldots &\ldots &\ldots &\ldots \\ \ln \overline{p_{n}} & \alpha_{n2} &\ldots & \alpha_{nn} \end{array} \right). $$

Expansion of the first column yields

$$ \begin{aligned} \det (\underline{\Upphi})\ln w_{1} &=\ln \overline{p_{1}}\cdot \Upphi_{11}+\ln \overline{p_{2}}\cdot \Upphi_{21}+{\ldots}+\ln \overline{p_{n}}\cdot\Upphi_{n1}=\sum\limits_{i=1}^{n}\Upphi_{i1}\ln \overline{p_{i}} \\ \ln w_{1}^{\det (\underline{\Upphi})} &=\sum\limits_{i=1}^{n}\ln \overline{p_{i}}^{\Upphi_{i1}}. \end{aligned} $$

Hence, the general solution of the equation system (17) reveals as

$$ \det (\underline{\Upphi})\ln w_{j}=\ln \overline{p_{1}}\cdot \Upphi_{1j}+\ln\overline{p_{2}}\cdot \Upphi_{2j}+{\ldots}+\ln \overline{p_{n}}\cdot \Upphi_{nj}=\sum\limits_{i=1}^{n}\Upphi_{ij}\ln \overline{p_{i}}. $$

Rearranging (55) and denoting \(\overline{p_{i}}=A_{i}p_{i}\prod\nolimits_{k=1}^{n}\alpha_{ik}^{\alpha _{ik}},\Upphi=\det (\underline{\Upphi}), \beta_{ij}=\Upphi_{ij}/\Upphi,\alpha_{j}=\prod\nolimits_{i=1}^{n}(\prod\nolimits_{k=1}^{n}\alpha_{ik}^{\alpha_{ik}})^{\Upphi_{ij}}\) and \(\gamma_{j}=\frac{1}{\Upphi}\ln\alpha_{j}\) the factor prices of the economy reveal as

$$ \ln w_{j}=\gamma_{j}+\sum\limits_{i=1}^{n}\beta_{ij}\ln A_{i}+\sum\limits_{i=1}^{n}\beta_{ij}\ln p_{i}. $$

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Engelmann, S. International trade, technological change and wage inequality in the UK economy. Empirica 41, 223–246 (2014).

Download citation


  • International trade
  • Technological change
  • Wage differentials

JEL Classification

  • F11
  • F16
  • J31