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Foreign Competition, Market Power and Wage Inequality: Theory and Evidence

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  • George J. Borjas
  • Valerie A. Ramey

Abstract

In this paper, we present theory and evidence on the link between wage inequality and foreign competition in concentrated industries. We develop a simple model in which the impact of foreign competition on the relative wages of an economy depends on the market structure of the industry penetrated. We show that the more concentrated is the industry, the greater is the impact of trade on general wage inequality. We use the theory to argue why import competition in an industry such as automobiles is much more deleterious to the wages of the less educated than import competition in an industry such as apparel. We then test our hypothesis using a panel data set on relative wages across SMSAs. We reinterpret our model as a model of local economies, and test it using both the cross-sectional and time- series variation across labor markets.

Suggested Citation

  • George J. Borjas & Valerie A. Ramey, 1993. "Foreign Competition, Market Power and Wage Inequality: Theory and Evidence," NBER Working Papers 4556, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4556
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    References listed on IDEAS

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    Cited by:

    1. Matthew J. Slaughter, 1995. "Multinational Corporations, Outsourcing, and American Wage Divergence," NBER Working Papers 5253, National Bureau of Economic Research, Inc.
    2. Rachel M. Friedberg & Jennifer Hunt, 1995. "The Impact of Immigrants on Host Country Wages, Employment and Growth," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 23-44, Spring.
    3. James D Adams, 1994. "Recent Twists of the Wage Structure and Technology Diffusion," Working Papers 94-5, Center for Economic Studies, U.S. Census Bureau.
    4. David A. Brauer, 1995. "Using regional variation to explain widening earnings differentials by educational attainment," Research Paper 9521, Federal Reserve Bank of New York.
    5. Gordon H. Hanson & Ann Harrison, 1995. "Trade, Technology, and Wage Inequality," NBER Working Papers 5110, National Bureau of Economic Research, Inc.
    6. Chinhui Juhn, 1994. "Wage Inequality and Industrial Change: Evidence from Five Decades," NBER Working Papers 4684, National Bureau of Economic Research, Inc.
    7. Robert E. Baldwin, 1995. "The Effects of Trade and Foreign Direct Investment on Employment and Relative Wages," OECD Jobs Study Working Papers 4, OECD Publishing.
    8. Nahuis, R., 1997. "On Globalisation, Trade and Wages," Research Memorandum 747, Tilburg University, School of Economics and Management.
    9. Peeters, J. & Vaal, A. de, 2000. "Explaining the wage gap: Heckscher-Ohlin, economic geography and services availability," Research Report 00C21, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    10. Feenstra, Robert C. & Hanson, Gordon H., 1997. "Foreign direct investment and relative wages: Evidence from Mexico's maquiladoras," Journal of International Economics, Elsevier, vol. 42(3-4), pages 371-393, May.
    11. Lin, Songhua, 2003. "International Trade, Location and Wage Inequality in China," WIDER Working Paper Series 061, World Institute for Development Economic Research (UNU-WIDER).
    12. Gupta, Manash Ranjan & Dutta, Priya Brata, 2010. "Skilled-unskilled wage inequality: A general equilibrium analysis," Research in Economics, Elsevier, vol. 64(4), pages 247-263, December.
    13. Pan, Lijun & Zhou, Yu, 2013. "International factor mobility, environmental pollution and skilled–unskilled wage inequality in developing countries," Economic Modelling, Elsevier, vol. 33(C), pages 826-831.
    14. Pi, Jiancai & Zhou, Yu, 2013. "Institutional quality and skilled–unskilled wage inequality," Economic Modelling, Elsevier, vol. 35(C), pages 356-363.
    15. Saibal Kar & Basudeb Guha-Khasnobis, 2006. "Foreign Capital, Skill Formation, and Migration of Skilled Workers," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 9(2), pages 107-123.
    16. Daniel Trefler, 1997. "Immigrants and Natives in General Equilibrium Trade Models," NBER Working Papers 6209, National Bureau of Economic Research, Inc.
    17. Gupta, Manash Ranjan & Dutta, Priya Brata, 2012. "Skilled–unskilled wage inequality, product variety, public input and increasing returns: A static general equilibrium analysis," Economic Modelling, Elsevier, vol. 29(2), pages 502-513.
    18. Kar, Saibal & Beladi, Hamid, 2004. "Skill formation and international migration: welfare perspective of developing countries," Japan and the World Economy, Elsevier, vol. 16(1), pages 35-54, January.
    19. Gupta, Manash Ranjan & Dutta, Priya Brata, 2011. "Skilled-unskilled wage inequality and unemployment: A general equilibrium analysis," Economic Modelling, Elsevier, vol. 28(4), pages 1977-1983, July.
    20. George J. Borjas, 1995. "The internationalization of the U.S. labor market and the wage structure," Economic Policy Review, Federal Reserve Bank of New York, issue Jan, pages 3-8.
    21. Blau Francine D & Kahn Lawrence M, 2007. "The Gender Pay Gap," The Economists' Voice, De Gruyter, vol. 4(4), pages 1-6, June.

    More about this item

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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