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Short and Long Run Decompositions of OECD Wage Inequality Changes

  • T. Huw Edwards
  • John Whalley

This paper focuses on the causes of increased wage inequality in OECD countries in recent years and its decomposition into the component factors of trade surges in low wage products and technological change that has preoccupied the trade and wages literature. It argues that the length of production run and degree of fixity of factors is crucial in such analyses. In particular, if the observed wage inequality response to price and technology shocks reflects a short-run response in which factors and output have not adjustedfully across industries, then decomposition analysis of the causes of the observed increases in inequality is substantially altered relative to a long-run factors mobile world. This conclusion applies both when one type of labour has mobility costs and in the Ricardo-Viner case where there is an additional, sectorally immobile factor. Furthermore, only small departures from the fully mobile model can greatly change decompositions. This finding is important because most data used in earlier work are interpreted as reflective of a long-run full mobility response, when this may not be the case. Incorrect conclusions as to how trade surges and technology contribute to wage inequality can be easily drawn, if the data are in fact generated by a short-run adjustment process.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9265.

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Date of creation: Oct 2002
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Publication status: published as Edwards, Terence Huw and John Whalley. "Short- and Long-Run Decompositions of UK Wage Inequality Changes." Bulletin of Economic Research 59, 1 (January 2007): 1-24.
Handle: RePEc:nbr:nberwo:9265
Note: ITI LS
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  1. Borjas, G.J. & Freeman, R.B. & Katz, L.F., 1991. "On The Labor Market Effects Of Immigration And Trade," Harvard Institute of Economic Research Working Papers 1556, Harvard - Institute of Economic Research.
  2. Lisandro Abrego & John Whalley, 1999. "The Choice of Structural Model in Trade-Wages Decompositions," NBER Working Papers 7312, National Bureau of Economic Research, Inc.
  3. M. Ayhan Kose & Raymond Riezman, 2013. "Understanding the Welfare Implications of Preferential Trade Agreements," World Scientific Book Chapters, in: International Trade Agreements and Political Economy, chapter 7, pages 85-99 World Scientific Publishing Co. Pte. Ltd..
  4. 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.
  5. Haskel, Jonathan & Slaughter, Matthew, 1998. "Does the Sector Bias of Skill-Biased Technical Change Explain Changing Wage Inequality?," CEPR Discussion Papers 1940, C.E.P.R. Discussion Papers.
  6. Matthew J. Slaughter, 1999. "Globalisation and Wages: A Tale of Two Perspectives," The World Economy, Wiley Blackwell, vol. 22(5), pages 609-629, 07.
  7. Mayer, Wolfgang, 1974. "Short-Run and Long-Run Equilibrium for a Small Open Economy," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 955-67, Sept./Oct.
  8. Leamer, E. & Levingsohn, J., 1994. "International Trade Theory: The Evidence," Working Papers 368, Research Seminar in International Economics, University of Michigan.
  9. Donald R. Davis, 1996. "Technology, Unemployment, and Relative Wages in a Global Economy," NBER Working Papers 5636, National Bureau of Economic Research, Inc.
  10. Haynes, Michelle & Upward, Richard & Wright, Peter, 2000. "Smooth and Sticky Adjustment: A Comparative Analysis of the US and UK," Review of International Economics, Wiley Blackwell, vol. 8(3), pages 517-32, August.
  11. Neary, J Peter, 1978. "Short-Run Capital Specificity and the Pure Theory of International Trade," Economic Journal, Royal Economic Society, vol. 88(351), pages 488-510, September.
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