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Explaining Intra- and Intersectoral Wage Differentials in Simple General Equilibrium Trade Models

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Author Info
Julius Spatz
Abstract

The labour markets in the developed countries have experienced two fundamental changes in recent years. Firstly, high-skilled workers have gained at the expense of low-skilled workers, which manifests itself in a rising skill premium and/or a rising disparity in the unemployment rates of these two skill groups. Secondly, sectors with low wage levels have expanded while sectors with high wage levels have contracted. By presenting two insider-outsider general equilibrium models, which analyse the impact of trade on both dimensions of income distribution, this paper seeks to contribute to the ongoing debate on whether the progressing globalisation of the world economy is to blame for these two trends. From this analysis, two important results emerge. Firstly, the distributional effects of trade are highly sensitive to even minor changes to the assumption of the 2 x 2 trade model. This suggests that due attention should be paid to the choice of the structural model. Secondly, there might be a bias inherent to the „mandated-wage approach" that makes most empirical studies fail to find a strong influence of trade on the skill premium.

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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1042.

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Length: 47 pages
Date of creation: Apr 2001
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Handle: RePEc:kie:kieliw:1042

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Related research
Keywords: trade; income distribution; real rigidities; insider-outsider model;

Find related papers by JEL classification:
F11 - International Economics - - Trade - - - Neoclassical Models of Trade
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

References listed on IDEAS
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  1. Gary Burtless, 1995. "International Trade and the Rise in Earnings Inequality," Journal of Economic Literature, American Economic Association, vol. 33(2), pages 800-816, June. [Downloadable!] (restricted)
  2. Ruffin, Roy J., 2001. "Quasi-specific factors: worker comparative advantage in the two-sector production model," Journal of International Economics, Elsevier, vol. 53(2), pages 445-461, April. [Downloadable!] (restricted)
  3. Cooley, Thomas F, 1997. "Calibrated Models," Oxford Review of Economic Policy, Oxford University Press, vol. 13(3), pages 55-69, Autumn.
  4. Haskel, Jonathan, 2000. "The Trade and Labour Approaches to Wage Inequality," CEPR Discussion Papers 2476, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Wood, Adrian, 1998. "Globalisation and the Rise in Labour Market Inequalities," Economic Journal, Royal Economic Society, vol. 108(450), pages 1463-82, September. [Downloadable!] (restricted)
  6. Wood, Adrian, 1995. "How Trade Hurt Unskilled Workers," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 57-80, Summer. [Downloadable!] (restricted)
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