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Trade in Intermediates and the Rise in Wage Inequality in the UK: A GNP Function Approach

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Alexander Hijzen

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Abstract

This paper contributes to the debate on trade and wages by estimating a GNP function for the United Kingdom using data for the period 1975-1999. Consistent with standard trade theory the GNP function treats factor supplies and output prices as exogenous and factor prices and output supplies as endogenous. Moreover, the GNP function explicitly distinguishes between different sectors and is therefore in principle consistent with general equilibrium trade theory. The signs of the estimated elasticities were mostly in line with theoretical predictions. The main findings of this paper are the following. Firstly, the skill bias of technological change is found to be the predominant source of the increase in wage inequality. Secondly, while the paper provides mixed results for the role of all trade, the results provide some evidence in support of the outsourcing-hypothesis which asserts that international outsourcing constitutes an important contributing factor to the widening wage gap. Finally, the factor-price insensitivity theorem does not seem to hold for the UK.

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 224.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:224

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Related research
Keywords: trade; factor supplies; wage inequality; GNP function;

Find related papers by JEL classification:
F14 - International Economics - - Trade - - - Country and Industry Studies of Trade
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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    Other versions:
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    Other versions:
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    Other versions:
  14. Burgess, David F, 1974. "A Cost Minimization Approach to Import Demand Equations," The Review of Economics and Statistics, MIT Press, vol. 56(2), pages 225-34, May. [Downloadable!] (restricted)
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