International trade, real wages and technical progress: The specific factors model

It has been over fifty years since Stolper and Samuelson (1941) pointed out that whereas free trade may be beneficial to a country in aggregate terms, even a broadbased factor such as labor may be hurt by the price changes which trade brings about. In particular, a staple of Heckscher-Ohlin trade theory is that relatively capital-abundant countries tend to import commodities which are produced by labor-intensive techniques at home, and the competition which such trade engenders serves to depress real wages. Recent battles to obtain passage of the NAFTA accord and Uruguay Round of GATT agreements in the United States have focused on the overall gains which freer trade is likely to produce, and have suggested, perhaps only implicitly, that the gains are sufficient to compensate potential losers among the working class. Such compensation schemes, however, are rarely introduced, although certain sections of the economy may achieve exceptions to a move to more liberal trade. Changes in the global trading scenario are taking place against a background of advances in technology. Technical progress in a country is generally expected to benefit most productive factors, but strict adherence to a narrow Heckscher-Ohlin interpretation suggests that if technical progress at home is centered in capital-intensive sectors, real wages will suffer, regardless of the capital-saving or labor-saving bias in technical change. Such a drop in real wages would be even more pronounced if simultaneously foreign countries are expanding the world output of labor-intensive products, both because of advances in foreign technology in these areas and, perhaps especially, because of the arrival of new labor-abundant countries into the world trading community. Elsewhere (Jones, 1995) I have agued that bias in technical progress and the possibility of variations in the bundles of commodities produced can play a role in letting Heckscher-Ohlin theory predict a richer and more realistic set of outcomes. The Heckscher-Ohlin model, however, is not the only model which can be used to analyze trade issues. In this paper I focus on the consequences of technical progress for real wages in a model in which labor is a mobile factor and sectors produce outputs by combining labor with human or physical capital that is tied to a particular industry, at least in the short run Although the sector-specific model easily accommodates many sectors, for ease of exposition the analysis focusses on the two-commodity case.