Abstract
The sharp increase in wage inequality observed from the 1990s has stimulated a lively debate concerning the causes of this phenomenon. The inequality in question concerns the rise in the wage of skilled labour (typically college educated workers) relative to the wage of unskilled labour (workers without college education). A change in the skill premium may occur for various reasons but the fact that it occurred at a time of rising globalization makes international trade a prime suspect. In this chapter we study the possible links between trade integration and rising skill premium. All the main models that aim at explaining the skill premium are examined in depth. An important empirical result is that the skill premium has increased in skill abundant as well as in skill scarce countries: a fact that runs against the convergence of relative factor prices predicted by the standard Heckscher-Ohlin model.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
The first group of studies is based on the Heckscher-Ohlin model studied in Chaps. 4 and 5. The second group of studies uses model structures related to the Krugman model studied in Sect. 9.2.1. The work by Krugman and Venables relates to models of economic geography studied in Sect. 16.4.2. The last group of studies uses models related to the work of Melitz studied in Sect. 9.2.7.
- 2.
We assume here that the conditions that give rise to such a correspondence are satisfied.
- 3.
See, e.g., Epifani and Gancia (2008) and Costinot and Vogel (2010, p. 782).
- 4.
The Stolper-Samuelson theorem is a constitutive element of the Stolper-Samuelson effect but does not coincide with it. In fact, the Stolper-Samuelson theorem only establishes a relationship between price of goods and price of factors stemming from profit maximization, and is not necessarily related to any specific general equilibrium evolution of prices.
- 5.
See Sect. 3.1 for the derivation of the transformation curve.
- 6.
Convergence of factor prices is not complete because technologies are different.
- 7.
Acemoglu (2002) addresses a number of issues other than the effect of trade integration on factor prices. We restrict the discussion to the matter related to this chapter. Further we simplify the exposition by assuming that factors are gross substitutes. When they are gross complements trade integration does not necessarily result in skill-biased technical change.
- 8.
We should be using f, g, etc. for different functional forms but we neglect this matter to keep notation at a minimum.
- 9.
This is reminiscent of Ricardian comparative advantage but here the comparative advantage is defined over worker-task pairs instead of country-good pairs.
- 10.
This is reminiscent of the traditional Ricardian model where specialization is complete.
- 11.
Incidentally, we also note that the wage schedule in H lies above that in F. This is again due to the fact that any worker in H is led by a better manager than any worker with the same skills in F. The convexity of the wage schedules is due to the complementarity between workers and managers established by expression (17.19).
- 12.
For clarity of exposition we have shown the case where z I ∗ lies to the right of z F , implying that all agents in F decide to become workers after globalization. Antràs et al. (2006) call this the “Low Quality Offshoring Equilibrium”. The threshold value z I ∗ could however fall to the left of z F , in which case some agents in F will remain managers after globalisation. The case shown in the figure has simpler implications. The alternative case is more complex but still gives rise to an increase in the skill premium in F, while giving rise to ambiguous effects in H.
- 13.
As an example, assume σ L = 4, σ S = 3, \(\varepsilon = 2\). Let \(\bar{S} =\bar{ L} = 10\) so that \(n_{S} = n_{L} = 10\) in autarky and \(n_{S} = n_{L} = 20\) in free trade. Therefore \(w_{S}/w_{L} = 1{0}^{1/12}\) in autarky and increases to 201 ∕ 12 in free trade.
- 14.
See any microeconomics textbook for further details on the concept of homotheticity.
- 15.
This sort of pro-competitive effect may emerge, for instance, in general equilibrium oligopoly à la Neary (2009) or Neary and Tharakan (2012), or in monopolistic competition with linear demand à la Ottaviano, Tabuchi, & Thisse (2002), or in monopolistic competition with translated additive demand à la Pollak (1971). The latter is the microfoundation chosen by Dinopoulos et al. (2011). We pass over the details of the microfoundation since they are not relevant to understanding the effect of trade opening on the skill premium.
- 16.
As an example consider ϕ L = 1 ∕ 4 and ϕ S = 3 ∕ 4. Then \(S_{e}/L_{e} = \root{2}\of{y}\left (S/L\right )\). Any increase in output—ceteris paribus—will increase the effective relative input of skilled labour.
- 17.
Figure 17.7 represent the same equilibrium as Fig. 9.2 of Sect. 9.2.1. The only difference is in the form of the demand curve. In Sect. 9.2.1 moving from autarky to free trade induces entry of new firms but firm’s output (for existing and new firms) is the same as in autarky. Here instead, moving from autarky to free trade induces firms to expand the output.
- 18.
This is in fact the same α as in the utility function given by expression (9.2). It is not surprising that a parameter of the utility function ends up in the revenue function: after all, the willingness to pay for the item produced by a firm depends on the utility consumers obtain from it.
- 19.
Here and throughout this section we use the term “competition” somewhat loosely. In fact, what takes place in the domestic market is a market-crowding effect similar to that studied in Sect. 9.2.1.3. In that case the market crowding resulted in the exit of firms; here it results in a reduction of output and revenue.
- 20.
The values s 1 and s 2 are determined endogenously by the equilibrium condition in the goods market and by the zero profit conditions. Since the determination of these values is not relevant for our purposes we disregard it for the sake of simplicity.
- 21.
The shadow unit cost is the unit cost that would obtain if the firm using technology L hired workers with skills between 0 and s 1.
- 22.
This only requires mild conditions on fixed costs.
- 23.
The expansion of the Y industry is consistent with the fact that the wage of workers with skills higher than \(\bar{s}\) increases relative to good Y, thereby inducing an increase in the demand for this good.
- 24.
Consider, for instance, two firms with the same employment h = 1 and with productivity levels ϕ ′ = 1 and ϕ ′ ′ = 2. Imagine they experience the same increase in average productivity of workers, \(\Delta \bar{s} = 1\). The output increases are, respectively, \({\phi }^{{\prime}}\Delta \bar{s}\) and \({\phi }^{{\prime\prime}}\Delta \bar{s}\) where clearly the latter is larger than the former since ϕ ′ ′ > ϕ ′.
- 25.
The labour market is modeled along the lines of Diamond-Mortensen-Pissarides search and matching frictions.
- 26.
This specification is obtained by assuming that the skill distribution is Pareto with shape parameter k and lower bound equal to one. This distribution also gives rise to the expression for the average skill of workers employed by the firm specified below.
- 27.
It is worth mentioning that the marginal revenue lines in Fig. 17.10a are plotted for given values of \(\underline{s}\). The revenue lines in Fig. 17.10b are plotted for given values of n. There is therefore a relationship between the optimal number of workers sampled and the optimal level of screening. This relationship is not relevant for understanding the model and we therefore disregard it.
- 28.
The cost function resulting from the production function in expression (17.5) has this property.
- 29.
This assumption is crucial and makes the difference between the parametrization of this model in this section and the parametrization in Sect. 16.3.
References
Acemoglu, D. (2002). Directed technical change.
Acemoglu, D. (2003). Patterns of skill premia.
Amir, R. (2005). Supermodularity and complementarity in economics: An elementary survey.
Amiti, M., & Davis, D. R. (2011). Trade, firms, and wages: Theory and evidence.
Antràs, P., Garicano, L., & Rossi-Hansberg, E. (2006). Offshoring in a knowledge economy.
Antràs, P., & Helpman, E. (2004). Global sourcing.
Bernard, A. B., Jensen, J. B., Redding, S. J., & Schott, P. K. (2007). Firms in international trade.
Burstein, A., & Vogel, J. (2012). Globalization, technology, and the skill premium.
Bustos, P. (2011). Trade liberalization, exports and technology upgrading: Evidence on the impact of MERCOSUR on Argentinian firms.
Costinot, A., & Vogel, J. (2010). Matching and inequality in the World economy.
Deardoff, A. V. (2000). Factor prices and the factor content of trade revisited: What’s the use?
Dinopoulos, E., Syropoulos, C., Xu, B., & Yotov, Y.V. (2011). Intraindustry trade and the skill premium: Theory and evidence.
Epifani, P. & Gancia, G. (2008). The skill bias of world trade.
Ethier, W. J. (1982). National and international returns to scale in the modern theory of international trade.
Feenstra, R. C., & Hanson, G. H. (1997). Foreign direct investment and relative wages: Evidence from Mexico’s Maquiladoras.
Feenstra, R. C., & Hanson, G. H. (1999). The impact of outsourcing and high-technology capital on wages: Estimates for the U.S., 1979–1990.
Garicano, L., & Rossi-Hansberg, E. (2006). Organization and inequality in a knowledge economy.
Goldberg, P., & Pavcnik, N. (2007). Distributional effects of globalization in developing countries.
Grossman, G. M., & Rossi-Hansberg, E. (2008). A simple theory of offshoring.
Helpman, E., Itskhoki, O., & Redding, S. (2010). Inequality and unemployment in a global economy.
Krugman, P. R. (2000). Technology, trade and factor prices.
Krugman, P. R., & Venables, A. J. (1995). Globalization and the inequality of nations.
Leamer, E. E. (2000). What’s the use of factor contents?.
Manasse, P., & Turrini, A. (2001). Trade, wages, and ‘superstars’.
Neary J. P. (2002). Foreign competition and wage inequality.
Neary, J. P. (2009). International trade in general oligopolistic equilibrium, mimeo, Oxford University.
Neary, J. P., & Tharakan, J. (2012). International trade with endogenous mode of competition in general equilibrium.
Panagariya, A. (2000). Evaluating the factor-content approach to measuring the effect of trade on wage inequality.
Pollak, R. A. (1971). Additive utility function and linear engel curves.
Unel, B. (2010). Firm heterogeneity, trade, and wage inequality.
Williamson, G. J. (2006). Globalization and the poor periphery before 1950.
Yeaple, S. R. (2005). A simple model of firm heterogeneity and international trade, and wages.
Author information
Authors and Affiliations
Rights and permissions
Copyright information
© 2014 Springer-Verlag Berlin · Heidelberg
About this chapter
Cite this chapter
Gandolfo, G. (2014). Trade Integration and Wage Inequality. In: International Trade Theory and Policy. Springer Texts in Business and Economics. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-37314-5_17
Download citation
DOI: https://doi.org/10.1007/978-3-642-37314-5_17
Published:
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-642-37313-8
Online ISBN: 978-3-642-37314-5
eBook Packages: Business and EconomicsEconomics and Finance (R0)