Working Paper: CEPR ID: DP2732
Authors: J. Peter Neary
Abstract: I review briefly the empirical evidence in the trade and wages debate, which overwhelmingly rejects the Heckscher-Ohlin explanation for recent increases in OECD skill premia. I then argue that the same evidence is also difficult to reconcile in general equilibrium with the view that exogenous skill-biased technological progress is the sole culprit. Finally, I present a model of oligopolistic competition, which is more consistent with the evidence. Removing quantitative import constraints (a metaphor for increased foreign competition) encourages both home and foreign firms to invest more aggressively, raising their demand for skilled labour even at unchanged relative wages.
Keywords: OECD; Wage Inequality; Oligopolistic Competition; Skill Premia; Skill Biased Technological Progress; Trade and Wages
JEL Codes: F12; J31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased foreign competition (F69) | Raises the demand for skilled labor (J24) |
| Trade liberalization (F13) | Rise in skill premium (J24) |
| Increased foreign competition (F69) | Increases demand for skilled labor even if relative wages remain unchanged (J24) |
| Trade liberalization (F13) | Increases demand for skilled labor (J24) |
| Skill-biased technological progress (J24) | Conflicts with observed increases in skill premia across all sectors (J39) |