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One Size Fits All? Specialization, Trade and Income Inequality

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  • Peter K. Schott

    ()
    (School of Management)

Abstract

Previous research has uncovered precious little support for Heckscher-Ohlin trade theory. This paper demonstrates that those efforts focus on an overly restrictive version of the model. Indeed, strong evidence that output is a function of endowments can be found if we recognize that countries with sufficiently disparate endowments specialize in different subsets of goods. This paper develops a technique for differentiating specialization from an equilibrium in which all countries produce the same goods. It also demonstrates that the industry aggregates used in previous studies hide a substantial degree of cross-country price and input intensity heterogeneity, violating the assumptions of the model and rendering previous results difficult to interpret. When traditional aggregates are corrected to account for this heterogeneity, support for specialization increases. Finally, this paper contributes to the current debate on trade and wages by illustrating that in 1990 the US was sufficiently capital abundant to have an output mix distinct from that of by low wage, labor abundant countries. This specialization mitigates the ability of cheap imports to adversely affect US workers, casting doubt on the argument that international trade is raising US income inequality.

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Bibliographic Info

Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm132.

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Date of creation: 02 Dec 1999
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Handle: RePEc:ysm:somwrk:ysm132

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Web page: http://icf.som.yale.edu/
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Cited by:
  1. Branko Milanovic, 2003. "Can We Discern The Effect Of Globalization On Income Distribution? Evidence From Household Surveys," HEW 0310002, EconWPA.
  2. Andrew B. Bernard & J. Bradford Jensen, 2001. "Who Dies? International Trade, Market Structure, and Industrial Restructuring," NBER Working Papers 8327, National Bureau of Economic Research, Inc.
  3. Branko Milanovic, 2003. "CAN WE DISCERN THE EFFECT OF GLOBALIZATION ON INCOME DISTRIBUTION? Evidence from Household Budget Surveys," International Trade 0303004, EconWPA.
  4. Wang-Sheng Lee, 2007. "Immigration and Wages: An Open Economy Model," Melbourne Institute Working Paper Series wp2007n07, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.

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