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Short and Long Run Decompositions of OECD Wage Inequality Changes

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 adjusted fully 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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File URL: http://economics.uwo.ca/research/department_working_papers_docs/wp2003/wp2003_2.pdf
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Paper provided by University of Western Ontario, Department of Economics in its series UWO Department of Economics Working Papers with number 20032.

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Date of creation: 2003
Date of revision: Sep 2002
Handle: RePEc:uwo:uwowop:20032
Contact details of provider: Postal: Department of Economics, Reference Centre, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2
Phone: 519-661-2111 Ext.85244
Web page: http://economics.uwo.ca/research/research_papers/department_working_papers.html

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  1. Lisandro Abrego & John Whalley, 1999. "The Choice of Structural Model in Trade-Wages Decompositions," NBER Working Papers 7312, National Bureau of Economic Research, Inc.
  2. 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.
  3. Davis, Donald R., 1998. "Technology, unemployment, and relative wages in a global economy," European Economic Review, Elsevier, vol. 42(9), pages 1613-1633, November.
  4. 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.
  5. 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.
  6. 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.
  7. Edward E. Leamer & James Levinsohn, 1994. "International Trade Theory: The Evidence," NBER Working Papers 4940, National Bureau of Economic Research, Inc.
  8. M. Ayhan Kose & Raymond Riezman, 1999. "Understanding the Welfare Implications of Preferential Trade Agreements," CSGR Working papers series 45/99, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
  9. Neven, Damien J & Wyplosz, Charles, 1996. "Relative Prices, Trade and Restructuring in European Industry," CEPR Discussion Papers 1451, C.E.P.R. Discussion Papers.
  10. Matthew J. Slaughter, 1999. "Globalisation and Wages: A Tale of Two Perspectives," The World Economy, Wiley Blackwell, vol. 22(5), pages 609-629, 07.
  11. 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.
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