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Demand Side Considerations and the Trade and Wages Debate

  • Lisandro Abrego
  • John Whalley

Recent trade and wages literature focuses on whether trade or technology has been the major source of increases in wage inequality in OECD countries since the 1980s. In this literature, no attention has been paid to demand side considerations. Using a simple heterogeneous goods trade model of the Armington type, and UK data, we show how trade shocks affecting the price of unskilled-intensive goods can be absorbed on the demand side, with little or no impact on relative wage rates. No wage impact occurs if the elasticity of substitution in preferences between imports and import substitutes is one. As this elasticity increases, trade plays an ever larger role in explaining wage inequality changes, and as the elasticity goes below one the sign of the effect changes. We suggest that since many import demand elasticity estimates are in the neighbourhood of one, there is a prima facie case that demand side considerations further lower the significance of trade as an explanation of recent trends in OECD wage inequality -beyond that reported in recent literature.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7674.

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Date of creation: Apr 2000
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Publication status: published as Abrego, Lisandro and John Whalley. "Goods Market Responses To Trade Shocks And Trade And Wages Decompositions," Canadian Journal of Economics, 2003, v36(3,Aug), 747-757.
Handle: RePEc:nbr:nberwo:7674
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  1. David H. Autor & Lawrence F. Katz & Alan B. Krueger, 1997. "Computing Inequality: Have Computers Changed the Labor Market?," NBER Working Papers 5956, National Bureau of Economic Research, Inc.
  2. repec:sae:niesru:v:166:y::i:1:p:78-86 is not listed on IDEAS
  3. Damien NEVEN. & Charles WYPLOSZ, 1996. "Relative Prices, Trade and Restructuring in European Industry," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9615, Université de Lausanne, Faculté des HEC, DEEP.
  4. Feenstra, Robert C & Hanson, Gordon H, 1996. "Globalization, Outsourcing, and Wage Inequality," American Economic Review, American Economic Association, vol. 86(2), pages 240-45, May.
  5. Jonathan Haskel & Matthew J. Slaughter, 1999. "Trade, Technology and U.K. Wage Inequality," NBER Working Papers 6978, National Bureau of Economic Research, Inc.
  6. George J. Borjas & Richard B. Freeman & Lawrence F. Katz, 1991. "On the Labor Market Effects of Immigration and Trade," NBER Working Papers 3761, National Bureau of Economic Research, Inc.
  7. Marquez, Jaime, 1994. "The Econometrics of Elasticities or the Elasticity of Econometrics: An Empirical Analysis of the Behavior of U.S. Imports," The Review of Economics and Statistics, MIT Press, vol. 76(3), pages 471-81, August.
  8. Clinton R. Shiells & Kenneth A. Reinert, 1993. "Armington Models and Terms-of-Trade Effects: Some Econometric Evidence for North America," Canadian Journal of Economics, Canadian Economics Association, vol. 26(2), pages 299-316, May.
  9. Krugman, Paul R., 2000. "Technology, trade and factor prices," Journal of International Economics, Elsevier, vol. 50(1), pages 51-71, February.
  10. Steven J. Davis, 1992. "Cross-Country Patterns of Change in Relative Wages," NBER Chapters, in: NBER Macroeconomics Annual 1992, Volume 7, pages 239-300 National Bureau of Economic Research, Inc.
  11. Baldwin, Robert E & Cain, Glen C, 1997. "Shifts in US Relative Wages: The Role of Trade, Technology and Factor Endowments," CEPR Discussion Papers 1596, C.E.P.R. Discussion Papers.
  12. André Sapir, 1999. "Labour market effects of trade with LDCs in Europe," ULB Institutional Repository 2013/8158, ULB -- Universite Libre de Bruxelles.
  13. Reinert, Kenneth A. & Roland-Holst, David W., 1992. "Armington elasticities for United States manufacturing sectors," Journal of Policy Modeling, Elsevier, vol. 14(5), pages 631-639, October.
  14. Lisandro Abrego & John Whalley, 1999. "The Choice of Structural Model in Trade-Wages Decompositions," NBER Working Papers 7312, National Bureau of Economic Research, Inc.
  15. Wood, Adrian, 1997. "Openness and Wage Inequality in Developing Countries: The Latin American Challenge to East Asian Conventional Wisdom," World Bank Economic Review, World Bank Group, vol. 11(1), pages 33-57, January.
  16. Peter Gottschalk & Timothy M. Smeeding, 1997. "Cross-National Comparisons of Earnings and Income Inequality," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 633-687, June.
  17. Bhattarai, Keshab & Ghosh, Madanmohan & Whalley, John, 1999. "On some properties of a trade closure widely used in numerical modelling," Economics Letters, Elsevier, vol. 62(1), pages 13-21, January.
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