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Is International Trade Guilty for an Enlarging Wage Differential? A Dynamic Intertemporal General Equilibrium Model

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  • Chang, Hsiao-Chuan

Abstract

There is much literature on the link between international trade, productivity growth and wage differential of skilled and unskilled labor. The theoretical and empirical research is mainly based on the Heckscher-Ohlin framework and on cases of large countries. More comprehensive theoretical models are needed to guide further empirical research. This paper contributes to the debate by constructing a dynamic intertemporal general equilibrium (DIGE) model incorporating endogenous skill formation. Both the short- and long-run transition mechanism with shocks can be illustrated. Also, it proposes education as an important factor in the determination of the wage differential. The result supports the argument that trade has a responsibility for an increased wage differential. A cut in government education investment tends to enlarge the wage differential. In contrast to the existing literature, this paper suggests that productivity growth may not be the cause of an enlarged wage differential in the long run.

Suggested Citation

  • Chang, Hsiao-Chuan, 2003. "Is International Trade Guilty for an Enlarging Wage Differential? A Dynamic Intertemporal General Equilibrium Model," Conference papers 331075, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:331075
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    References listed on IDEAS

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