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The Effects of Factor- and Sector-biased Technical Change Revisited

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  • Robert Stehrer

    ()
    (The Vienna Institute for International Economic Studies, wiiw)

Abstract

In the trade-technology-wage debate, the effects of the various forms of technical progress on relative factor prices have been addressed in a number of contributions over the past decade. However, the existing literature is far from conclusive. The various contributions either relied on specific assumptions, such as Leontief technologies or Cobb-Douglas demand, that were decisive for the respective conclusions, or they used a more general framework, arriving at ambiguous results in many cases. In this paper we analyse a general equilibrium framework with CES production and CES demand functions, which allows for any discrete number of sectors and countries integrated via trade flows. Technologies are country- and sector-specific and endowment structures differ across countries. The necessary and sufficient conditions under which the relative wage rates are rising or falling in the domestic and foreign economies are derived. This is done for various types of factor- and sector-biased technical change taking place in a particular sector in either the home or foreign country. The conditions - depending on the relative skill intensity of the innovating sector, the elasticities of substitution in demand and supply, the relative factor endowment and the prevailing (equilibrium) relative wage rate - allow for straightforward economic interpretations. This permits to solve the cases classified as ambiguous in the existing literature and provides clear-cut conditions which are important for modelling and empirical research. Furthermore, the results are interpreted with respect to recent empirical studies where special emphasis is given to the sector-biased versus factor-biased hypotheses.

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Bibliographic Info

Paper provided by The Vienna Institute for International Economic Studies, wiiw in its series wiiw Working Papers with number 35.

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Date of creation: Sep 2005
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Publication status: Published as wiiw Working Paper
Handle: RePEc:wii:wpaper:35

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Keywords: factor prices; technical change; trade; multi-sector and multi-country model;

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References

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  1. J Peter Neary, 2002. "Globalisation and Market Structure," Working Papers 200220, School Of Economics, University College Dublin.
  2. Krugman, Paul R., 2000. "Technology, trade and factor prices," Journal of International Economics, Elsevier, vol. 50(1), pages 51-71, February.
  3. Haskel, Jonathan E. & Slaughter, Matthew J., 2002. "Does the sector bias of skill-biased technical change explain changing skill premia?," European Economic Review, Elsevier, vol. 46(10), pages 1757-1783, December.
  4. Donald R. Davis, 1996. "Technology, Unemployment, and Relative Wages in a Global Economy," NBER Working Papers 5636, National Bureau of Economic Research, Inc.
  5. Acemoglu, Daron, 2002. "Directed Technical Change," Review of Economic Studies, Wiley Blackwell, vol. 69(4), pages 781-809, October.
  6. Landesmann, Michael A. & Stehrer, Robert, 2001. "Convergence patterns and switchovers in comparative advantage," Structural Change and Economic Dynamics, Elsevier, vol. 12(4), pages 399-423, December.
  7. Wood, Adrian, 1995. "North-South Trade, Employment and Inequality: Changing Fortunes in a Skill-Driven World," OUP Catalogue, Oxford University Press, number 9780198290155, September.
  8. Robert Stehrer & Julia Wörz, 2003. "Technological convergence and trade patterns," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 139(2), pages 191-219, June.
  9. Xu, Bin, 2001. "Factor bias, sector bias, and the effects of technical progress on relative factor prices," Journal of International Economics, Elsevier, vol. 54(1), pages 5-25, June.
  10. Zhu, Susan Chun & Trefler, Daniel, 2005. "Trade and inequality in developing countries: a general equilibrium analysis," Journal of International Economics, Elsevier, vol. 65(1), pages 21-48, January.
  11. R. Dornbusch & S. Fischer & P. A. Samuelson, 1976. "Comparative Advantage, Trade and Payments in a Ricardian Model With a Continuum of Goods," Working papers 178, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Dornbusch, Rudiger & Fischer, Stanley & Samuelson, Paul A, 1980. "Heckscher- Ohlin Trade Theory with a Continuum of Goods," The Quarterly Journal of Economics, MIT Press, vol. 95(2), pages 203-24, September.
  13. Robert Feenstra & Gordon Hanson, 2001. "Global Production Sharing and Rising Inequality: A Survey of Trade and Wages," NBER Working Papers 8372, National Bureau of Economic Research, Inc.
  14. John Romalis, 2004. "Factor Proportions and the Structure of Commodity Trade," American Economic Review, American Economic Association, vol. 94(1), pages 67-97, March.
  15. Trefler, Daniel, 1993. "International Factor Price Differences: Leontief Was Right!," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 961-87, December.
  16. Ronald W. Jones, 1965. "The Structure of Simple General Equilibrium Models," Journal of Political Economy, University of Chicago Press, vol. 73, pages 557.
  17. Findlay, Ronald & Jones, Ronald, 2000. "Factor bias and technical progress," Economics Letters, Elsevier, vol. 68(3), pages 303-308, September.
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Cited by:
  1. Polgár, Éva Katalin & Wörz, Julia, 2010. "Trade with central and eastern Europe: Is it really a threat to wages in the west?," Working Paper Series 1244, European Central Bank.
  2. Éva Polgár & Julia Wörz, 2010. "No risk and some fun? Trade and wages in the enlarged European Union," Empirica, Springer, vol. 37(2), pages 127-163, May.

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