Wage Inequality and Skill Supplies in a Globalised World

We investigate empirically, and explain theoretically, how the relative wages of skilled and unskilled workers vary with their relative supplies in open economies. Our results resolve a conflict between the predictions of standard trade theory and experience of how labour markets work. We show that relative wages respond to variation in relative skill supplies in countries that trade, as intuition and much other evidence suggest, but also that the wage response decreases as trade barriers fall and that, as trade theory suggests, is weak in very open economies.