Increasing wage inequality: Role of changing trade, technology and factor endowments

In the first part of this work I numerically solve a two-country model with CES production and consumption, tariffs, and different technologies of production across North and South to produce plausible values of relative wages and shares of skilled and unskilled labor as a base equilibrium. Simulations on the model are then used for exploring theoretical issues relating to the debate on increasing wage inequality in the North. Specifically, technology, endowments, and impediments to trade are allowed to change in North or South, one at a time, so as to produce observed increase in trade. The exercise strengthens the insight that in such a two-country model, small volume of trade is associated with a small impact on factor prices for reasonable elasticities in production and demand. This insight is robust to the presence of nontraded goods in the economy or to the fact that highly unskilled-labor-intensive exports from South are largely noncompeting in the North. The simulations also confirm that it is not possible to qualitatively infer changes in international goods prices from increased trade flows between North and South.; The empirical part of the work develops and estimates a general equilibrium regression model to measure the impact of changes in relative product prices, endowments and technology on relative wage of 'highly educated' (skilled) and 'less educated' (unskilled) labor in the United States during 1974-94. An important result of the estimation is that price changes in goods manufacturing industries, which directly faced import-competition do not explain much of the skilled-unskilled wage differential, while changes in aggregate price of largely nontraded services track the differential fairly well. This is interpreted as depicting a small role for increasing trade. The time trend, which could be interpreted as measuring technical progress, has a large explanatory role in the time pattern of wage differential and this trend was biased in favor of college graduates and goods producing industries. Large changes in the relative supply of more educated labor acted towards containing the wage differential substantially.