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Shifts in U.S. Relative Wages: The Role of Trade, Technology, and Factor Endowments

  • R. E. Baldwin
  • G. G. Cain

This paper investigates three hypotheses to account for the observed shifts in U.S. relative wages of less educated workers compared to more educated workers during the period from 1967 to 1992: (1) increased import competition, (2) changes in the relative supplies of labor of different educational levels, and (3) changes in technology. Our analysis relies on a basic relationship of the standard general equilibrium trade model that relates changes in product prices to factor price changes and factor shares, together with information about changes in the composition of output and trade, within-industry factor use, and factor supplies. For the period from 1967 to 1973, we conclude that the relative increase in the supply of well-educated labor was the dominant economic force that narrowed the wage gap among workers of different educational levels. In the 1980s and early 1990s, however, the wage gap between more educated and less educated workers widened sharply, despite the continued relative increase in the supply of workers with more education. We conclude that increased import competition cannot account for the observed increase in inequality among the major education groups, although it could have been a contributory cause of the decrease in the relative wages of the least educated workers. Instead, we find support for technical progress that is saving of less educated labor and that is more rapid in some manufacturing sectors intensively using highly educated labor as the dominant force in widening the wage gaps among college-educated workers, workers with a completed high school education, and workers with 1–11 years of schooling. Finally, we use the Deardorff-Staiger model, which allows changes in the factor content of trade to reveal the effects of trade on relative factor prices. Our empirical tests reinforce the conclusion that increased import competition between 1977 and 1987 was not the dominant force in widening the wage

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Paper provided by University of Wisconsin Institute for Research on Poverty in its series Institute for Research on Poverty Discussion Papers with number 1132-97.

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Handle: RePEc:wop:wispod:1132-97
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  1. Berman, E. & Bound, J. & Machin, S., 1997. "Implications of Skill-Biased Technological Change: International Evidence," Papers 25, Centre for Economic Performance & Institute of Economics.
  2. Wood, Adrian, 1995. "North-South Trade, Employment and Inequality: Changing Fortunes in a Skill-Driven World," OUP Catalogue, Oxford University Press, number 9780198290155, March.
  3. Ronald W. Jones, 1965. "The Structure of Simple General Equilibrium Models," Journal of Political Economy, University of Chicago Press, vol. 73, pages 557.
  4. Paul Krugman & Robert Lawrence, 1993. "Trade, Jobs, and Wages," NBER Working Papers 4478, National Bureau of Economic Research, Inc.
  5. Ronald Jones, 1970. "The Role of Technology in the Theory of International Trade," NBER Chapters, in: The Technology Factor in International Trade, pages 73-94 National Bureau of Economic Research, Inc.
  6. George J. Borjas & Richard B. Freeman & Lawrence F. Katz, 1992. "On the Labor Market Effects of Immigration and Trade," NBER Chapters, in: Immigration and the Workforce: Economic Consequences for the United States and Source Areas, pages 213-244 National Bureau of Economic Research, Inc.
  7. Alan B. Krueger, 1997. "Labor Market Shifts and the Price Puzzle Revisited," NBER Working Papers 5924, National Bureau of Economic Research, Inc.
  8. Edward E. Leamer, 1996. "In Search of Stolper-Samuelson Effects on U.S. Wages," NBER Working Papers 5427, National Bureau of Economic Research, Inc.
  9. Stephen Nickell & D. Nicolitsas, 1994. "Wages," LSE Research Online Documents on Economics 51644, London School of Economics and Political Science, LSE Library.
  10. Edward E. Leamer, 1992. "Wage Effects of A U.S. - Mexican Free Trade Agreement," NBER Working Papers 3991, National Bureau of Economic Research, Inc.
  11. Jones, Ronald W. & Peter Neary, J., 1984. "The positive theory of international trade," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 1, pages 1-62 Elsevier.
  12. 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.
  13. Hakura, D. & Deardorff, A.V., 1993. "Trade and Wages: What Are the Questions?," Working Papers 341, Research Seminar in International Economics, University of Michigan.
  14. 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.
  15. Martin, John P & Evans, John M, 1981. "Notes on Measuring the Employment Displacement Effects of Trade by the Accounting Procedure," Oxford Economic Papers, Oxford University Press, vol. 33(1), pages 154-64, March.
  16. Ethier, Wilfred J., 1984. "Higher dimensional issues in trade theory," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 3, pages 131-184 Elsevier.
  17. Revenga, Ana L, 1992. "Exporting Jobs? The Impact of Import Competition on Employment and Wages in U.S. Manufacturing," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 255-84, February.
  18. Deardorff, Alan V. & Staiger, Robert W., 1988. "An interpretation of the factor content of trade," Journal of International Economics, Elsevier, vol. 24(1-2), pages 93-107, February.
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