Technological change, trade and wage differential in developing countries

This dissertation explores the relationship between technological change and wage inequality in the presence of trade in the context of countries at various stages of development.Since the 1980s, many developed nations experienced an increase in wage inequality as measured by college premium or inter-percentile wage differential. The skill-biased technological change (SBTC) hypothesis explains this phenomenon by pointing to the role of fast evolving computer-related technological change, and argues that skilled workers are rewarded at a higher rate in such environment as they are more adept in keeping up pace.Another hypothesis highlights the role of increasing volume of trade between countries at various stages of development. It argues that the low-skilled jobs are being shipped to the relatively labor-abundant developing countries with comparative advantage for such jobs. This leaves manual production workers in the developed countries with fewer opportunities and lower relative wages.This dissertation contributes both theoretically and empirically to the existing literature by exploring these two competing theories. It incorporates skill-biased technological change in the framework of the Specific factors model of international trade. It shows that a SBTC is neither a necessary nor a sufficient condition for increasing wage differential. It also highlights the importance of elasticities of substitution between factors of production and factor intensities in determining the direction of change in wage differential.The empirical part of this study utilizes a household level dataset of the Indian economy and an aggregated input-output dataset of the Indian manufacturing sector. Given the developing country context of the study, contrasting dynamics are explored. It is empirically well-established in the human capital theory that education premium is relatively higher in developing countries. However, if developing countries are recipient of an influx of less-skilled jobs, then the relative wages of these workers are expected to rise. This may lead to a converging wage inequality in these countries.The results indicate that a convergence in relative wages between manual and non-manual workers in the manufacturing sector took place in the 1980s and in early part of 1990s. Furthermore, evidence of complementarity between these two groups of workers is found.