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Decomposing Wage Inequality Change Using General Equilibrium Models

This paper presents ex post decomposition analysis of wage inequality change using multi-sector general equilibrium models. The analytical structure used is a specific-factors model of trade, which we calibrate to UK data for two years, 1979 and 1995. We first calibrate our general equilibrium trade model to observations on wage inequality, trade, production and consumption spanning these years, capturing the separate influences of trade, technology and demographics on inequality. Between these years wage inequality changed, but multiple changes in exogenous variables occurred (world prices, technology, endowments). We use calibration techniques to determine parameter values consistent with both the equilibria and the changes in exogenous variables contributing to the wage inequality change being decomposed. We then compute counterfactual equilibria in which only some of the changes in exogenous variables are present to allow us to assess what portion of the observed change is attributable to the various contributing factors. Our findings are that the role factor-biased technological change is larger than in earlier literature. We also find changes in factor endowments to offset increased inequality generated by trade and skilled-biased technological changes, a feature that seems to have gone relatively unnoticed in earlier literature.

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Paper provided by University of Western Ontario, Economic Policy Research Institute in its series University of Western Ontario, Economic Policy Research Institute Working Papers with number 20022.

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Date of creation: 2002
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Handle: RePEc:uwo:epuwoc:20022
Contact details of provider: Postal: Economic Policy Research Institute, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2
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Web page: http://economics.uwo.ca/research/research_papers/epri_workingpapers.html

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  1. repec:cup:cbooks:9780521266550 is not listed on IDEAS
  2. Stephen Machin & John Van Reenen, 1998. "Technology And Changes In Skill Structure: Evidence From Seven Oecd Countries," The Quarterly Journal of Economics, MIT Press, vol. 113(4), pages 1215-1244, November.
  3. Gary Burtless, 1995. "International Trade and the Rise in Earnings Inequality," Journal of Economic Literature, American Economic Association, vol. 33(2), pages 800-816, June.
  4. Berman, Eli & Bound, John & Griliches, Zvi, 1994. "Changes in the Demand for Skilled Labor within U.S. Manufacturing: Evidence from the Annual Survey of Manufactures," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 367-97, May.
  5. Robert C. Feenstra & Gordon H. Hanson, 1996. "Globalization, Outsourcing, and Wage Inequality," NBER Working Papers 5424, National Bureau of Economic Research, Inc.
  6. R. E. Baldwin & G. G. Cain, . "Shifts in U.S. Relative Wages: The Role of Trade, Technology, and Factor Endowments," Institute for Research on Poverty Discussion Papers 1132-97, University of Wisconsin Institute for Research on Poverty.
  7. Jeffrey D. Sachs & Howard J. Shatz, 1994. "Trade and Jobs in Manufacturing," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 1-84.
  8. Haskel, Jonathan & Slaughter, Matthew, 1999. "Trade, Technology and UK Wage Inequality," CEPR Discussion Papers 2091, C.E.P.R. Discussion Papers.
  9. Joseph F. Francois & Douglas Nelson, 1998. "Trade, Technology, and Wages: General Equilibrium Mechanics," Tinbergen Institute Discussion Papers 98-058/2, Tinbergen Institute.
  10. repec:sae:niesru:v:166:y::i:1:p:78-86 is not listed on IDEAS
  11. Abrego, Lisandro & Whalley, John, 2000. "The Choice of Structural Model in Trade-Wages Decompositions," Review of International Economics, Wiley Blackwell, vol. 8(3), pages 462-77, August.
  12. Nicole M. Fortin & Thomas Lemieux, 1997. "Institutional Changes and Rising Wage Inequality: Is There a Linkage?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 75-96, Spring.
  13. repec:cup:cbooks:9780521319867 is not listed on IDEAS
  14. Mussa, Michael, 1974. "Tariffs and the Distribution of Income: The Importance of Factor Specificity, Substitutability, and Intensity in the Short and Long Run," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1191-1203, Nov.-Dec..
  15. David Card, 1998. "Falling Union Membership and Rising Wage Inequality: What's the Connection?," NBER Working Papers 6520, National Bureau of Economic Research, Inc.
  16. Paul Krugman, 1995. "Technology, Trade, and Factor Prices," NBER Working Papers 5355, National Bureau of Economic Research, Inc.
  17. Jonathan E. Haskel & Matthew J. Slaughter, 1998. "Does the Sector Bias of Skill-Biased Technical Change Explain Changing Wage Inequality?," NBER Working Papers 6565, National Bureau of Economic Research, Inc.
  18. Dawkins, Christina & Srinivasan, T.N. & Whalley, John, 2001. "Calibration," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 5, chapter 58, pages 3653-3703 Elsevier.
  19. 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.
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