A Labour-Based Theory of International Trade

This new model of international trade patterns is based on differing relative labor costs derived from differing endowments of skilled and unskilled labor, when labor is in elastic supply because of social support systems. All factors other than labor are assumed to be mobile across frontiers; constant returns to scale prevail. The model predicts that (1) high wage countries will export goods intensive in skilled labor (a hierarchy is proposed from 'expensive', skilled-labor-intensive, and often new products or services, all the way to 'cheap', unskilled-labor-intensive, often old products capable of mass manufacture); (2) wage equalization across borders for the same labor type can be frustrated by social support, notably for unskilled workers in high wage countries, who will be unemployed; (3) mercantilism has a pay-off in the form of lower unemployment. The theory is tested empirically in three ways. First, assuming unit value indices (uvis) are an index of 'expensiveness', country uvis are regressed on country wages for SITC 3-digit groups in textiles, machinery, and electrical apparatus. Second, country net exports in expensive and cheap labor commodity groups are regressed on country wages. Finally, country net exports are regressed on an index of skilled-labor-intensiveness for high-wage, low-wage and intermediate-wage countries.