Working Paper: NBER ID: w7674
Authors: Lisandro Abrego; John Whalley
Abstract: Recent trade and wages literature focuses on whether trade or technology has been the major source of increases in wage inequality in OECD countries since the 1980s. In this literature, no attention has been paid to demand side considerations. Using a simple heterogeneous goods trade model of the Armington type, and UK data, we show how trade shocks affecting the price of unskilled-intensive goods can be absorbed on the demand side, with little or no impact on relative wage rates. No wage impact occurs if the elasticity of substitution in preferences between imports and import substitutes is one. As this elasticity increases, trade plays an ever larger role in explaining wage inequality changes, and as the elasticity goes below one the sign of the effect changes. We suggest that since many import demand elasticity estimates are in the neighbourhood of one, there is a prima facie case that demand side considerations further lower the significance of trade as an explanation of recent trends in OECD wage inequality -beyond that reported in recent literature.
Keywords: No keywords provided
JEL Codes: F1; D58; J31; O30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade shocks (F14) | Wage Inequality (J31) |
| Elasticity of substitution = 1 (D11) | Trade shocks have negligible impact on Wage Inequality (F66) |
| Elasticity of substitution > 1 (D11) | Trade plays a larger role in Wage Inequality (F16) |
| Elasticity of substitution < 1 (D11) | Negative impact on Wage Inequality (F66) |
| Trade shocks (F14) | Wage rates (J31) |