Wage inequality and skill supplies in a globalised world

Abstract

We investigate empirically how the relative wages of skilled and unskilled workers vary with their relative supplies in open economies. The investigation is based on a Heckscher-Ohlin model that is more general than the canonical version and related to recent advances in trade theory. Our results bridge the gap between trade economists and labour economists in views on the role of national labour markets in wage determination when countries trade. As labour economists believe, relative wages are sensitive to variation in skill supplies in open economies. As trade economists believe, however, this sensitivity decreases with openness to trade.

Theoretical Underpinnings of ‘Land Abundance, Openness, and Industrialization’

“…Equations ( 46) and ( 49) set bounds on the elasticity of substitution in a single market. These single-market elasticities can then be weighted by the sizes of home and foreign markets (as in Rotunno and Wood (2020)) to obtain one approximate demand-side elasticity of substitution for the country concerned. The analysis in this appendix thus supports the argument of Wood (2023) and of Rotunno and Wood (2020) that in a country which is more open to trade (with a less protected home market and selling more of its output in foreign markets), the relative sales of the varieties of goods it produces will be more responsive to variation in their relative prices.…”

The 1990s trade and wages debate in retrospect

“… I did not work out how to formalise the theory in my book until much later (Rotunno & Wood, ; Wood, ). Pressure to do so at the time led me (in Wood, , , ) to try to force what was in key respects a non‐HOS model into a multicone HOS framework, which was only partially successful. …”

Land Abundance, Openness, and Industrialization

“…What creates an interaction in this term is that the effective size of the finite demand elasticities is likely to rise with a country's openness to trade (Rotunno and Wood, 2020). Where lower barriers to imports cause home firms to have smaller shares of the home market, the prices they charge for their varieties have a smaller effect on the average prices of all varieties of the goods concerned, so the relative sales of home varieties of different goods depend more on the higher elasticities of substitution in consumption between foreign and domestic varieties and less on the lower elasticities of substitution among goods.…”

“…Their results refer implicitly to outcomes at the average degree of openness of the countries in their data. However, in this paper's modified HO model, which draws on that of Rotunno and Wood (2020), the elasticity of output structure with respect to endowments increases with a country's openness to trade.…”

“…Structural estimation of the causal links underlying this effect would require more information on land rents and land use than is available for the range of countries and years covered in this study. Indirect evidence of the links, however, can be derived from the results of Rotunno and Wood (2020), who estimate a similar model, with a different pair of factors, both in reduced form and structurally. They find that, with greater openness to trade, factor prices are less affected by variation in endowments.…”