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Variety-skill complementarity: a simple resolution of the trade-wage inequality anomaly

  • Yoshinori Kurokawa

    ()

The Stolper-Samuelson theorem predicts that the relative wage of high-skilled to low-skilled labor will increase in the high-skill abundant U.S. but decrease in low-skill abundant Mexico after trade liberalization, while it actually began to rise in both countries in the late 1980s. We present a simple resolution of this "trade-wage inequality anomaly" in a model of variety trade. Variety trade increases the variety of intermediate goods used by the final good. If the varieties and high-skilled labor are complements, the skill premium rises in both countries. This linking of imports of new foreign varieties?---the extensive margin?---to wage inequality is compatible with evidence. Our numerical examples illustrate that small amounts of variety trade can produce a signi?ficant increase in relative wage.

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Article provided by Springer in its journal Economic Theory.

Volume (Year): 46 (2011)
Issue (Month): 2 (February)
Pages: 297-325

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Handle: RePEc:spr:joecth:v:46:y:2011:i:2:p:297-325
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