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Demand Side Considerations and the Trade and Wages Debate

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  • Lisandro Abrego
  • John Whalley

Abstract

Recent trade and wages literature focuses on whether trade or technology has been the major source of increases in wage inequality in OECD countries since the 1980s. In this literature, no attention has been paid to demand side considerations. Using a simple heterogeneous goods trade model of the Armington type, and UK data, we show how trade shocks affecting the price of unskilled-intensive goods can be absorbed on the demand side, with little or no impact on relative wage rates. No wage impact occurs if the elasticity of substitution in preferences between imports and import substitutes is one. As this elasticity increases, trade plays an ever larger role in explaining wage inequality changes, and as the elasticity goes below one the sign of the effect changes. We suggest that since many import demand elasticity estimates are in the neighbourhood of one, there is a prima facie case that demand side considerations further lower the significance of trade as an explanation of recent trends in OECD wage inequality -beyond that reported in recent literature.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7674.

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Date of creation: Apr 2000
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Publication status: published as Abrego, Lisandro and John Whalley. "Goods Market Responses To Trade Shocks And Trade And Wages Decompositions," Canadian Journal of Economics, 2003, v36(3,Aug), 747-757.
Handle: RePEc:nbr:nberwo:7674

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  1. Marquez, Jaime, 1994. "The Econometrics of Elasticities or the Elasticity of Econometrics: An Empirical Analysis of the Behavior of U.S. Imports," The Review of Economics and Statistics, MIT Press, vol. 76(3), pages 471-81, August.
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  14. Reinert, Kenneth A. & Roland-Holst, David W., 1992. "Armington elasticities for United States manufacturing sectors," Journal of Policy Modeling, Elsevier, vol. 14(5), pages 631-639, October.
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  16. Khalid Sekkat & Mathias Dewatripont & André Sapir, 1999. "Labor market effects of trade with LDC's in Europe," ULB Institutional Repository 2013/7378, ULB -- Universite Libre de Bruxelles.
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Cited by:
  1. Lawrence Edwards & Robert Z. Lawrence, 2010. "US Trade and Wages: The Misleading Implications of Conventional Trade Theory," NBER Working Papers 16106, National Bureau of Economic Research, Inc.

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