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Economic Perspectives

Arbache (2001) demonstrates a correlation involving an increase in international trade, wage distribution and level of employment. This has led several economists to conclude that the recent integration of factor and product markets have contributed to the increase in the dispersion of wages and unemployment. This is sustained by the Heckscher-Ohlin model. In general, empirical studies show that the impact of international trade on wages inequality is kept. Partly, explained by the small proportion of products imported from developing countries (Krugman (1995) and Machin (1999)).

Sachs and Shatz (1994) and Haskel and Slaughter (2001) explore the case for the U.S. and uncover a comparative increase of prices of products concentrated in skilled labour as an outcome of global integration. In addition, Leamer (1994) also finds an increase of relative prices of products concentrated in skilled labour, and a decrease of relative prices of sectors concentrated in unskilled labour for the U.S. during the 1970s, at what time there was a large increase in American imports. On the other hand, Lawrence and Slaughter (1993) and Bhagwati (1991) do not find a clear trend in relative prices of goods in the U.S. during the 1980s. Hence, an impact on relative wages is not revealed. Nonetheless, Revenga (1992) measured the impact of changes in imports on wages in the U.S. and established that the prices of imported goods had diminutive effects on wages.

Furthermore, Feenstra and Hanson (1994) uncovered results via U.S. series for exports, imports, and domestic prices, published by the Bureau of Labour Statistics. They found that trade hadn’t lowered the price goods produced by relatively low income labour. In addition, ‘U.S. domestic prices have risen relative to U.S. import prices of all categories, at least since the strong dollar of the early 1980s’.

8 Subsequently, evidence implies that trade prices contributed to wage inequality in the U.S.

Indeed, the global integration of factor and products markets has shown some impact on wages, however, there are other plausible reasons that have had a significant impact on wages. Several economists claim that ‘technological innovation is a more plausible explanation for the shift towards skilled labour’.

9 Lawrence and Murphy (1992) conclude that it is technological progress and innovation which has led to an increase in demand for skilled workers, whilst reducing the demand for unskilled worker. Hence, there has been an increase in wage inequality between skilled and unskilled workers, due to greater than before, substitution of unskilled workers for technologically advanced capital machinery.

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Wood (1995) argues that several studies carried out have found increases in the skill intensity of employment in certain industries to be correlated with new technology. This involving, computers, capital stock, plus the use of research and development. Berman, Bound and Griliches (1994) conclude with strong empirical evidence that the correlation between trade and technology have had an impact on wages in the U.S. Nonetheless, Kruger (1993) found that the increased use of computers throughout the 1980s contributed to the increase in wage inequality, amongst skilled workers. Furthermore, Mishel and Bernstien (1994) also found that changes in technology had an affect on the wage structure among the developed countries during the 1980s.

Added studies investigating the sector of technological change discover that total factor productivity raised skill differentials among skilled and unskilled worker in the U.S. Feenstra and Hanson (1999) decompose the U.S total factor productivity and discover that implementation of technology affected wage disparity. Moreover, Haskel and Slaughter (2001) also found wage inequality in the U.K. due to technology development.

Studies carried out by Machin (1999) deduced that research and development, technological innovations and the use of computers are essential factors in the rise in the relative demand for skilled labour. Throughout the 1980s many workers were replaced by computers and new machinery. Such an immense substitution affect had a major impact on the wage of unskilled workers. This was largely concentrated over states in the north of U.S and over a few states in the south.

A further source which has instigated changes in wages has been the idea of outsourcing, ‘by which we mean the import of intermediate inputs by domestic firms, and the location of other activities across countries’

10 (Feenstra and Hanson (1996)). Proviso to economic theory, if firms move non-skilled-intensive activities abroad trade will transfer employment towards skilled workers within industries. This is due to greater import competition as a resultant of global integration of factor and product markets. It is believed that firms will move non-skilled activities abroad due to cheaper production costs in most developing countries. Such a profit-maximising concept was vastly used over the 1980s, as more and more firms started to discover labour saving techniques and cost saving techniques.

By looking at regressions reported by Eli Berman et al. (1994) and Feenstra and Hanson (1996), we can deduce whether there was an impact of outsourcing on the relative wages in the U.S.

Figure 2 – Regression results for the change in non-production wage share. [Berman et al. (1994)] The regression results show the changes in wage share between two periods. One can deduce that both change in outsourcing (?so) and the change in import share (?sm) are positively correlated with the change in the non-production wage share.

Results illustrate that over 1972-1979 outsourcing was statistically significant in import shares. Moreover, during 1979-1990 ‘outsourcing can account for 30.9 percent of the increase in the wage share that occurred in the 1980’s’.

11 This is calculated by multiplying the change in outsourcing coefficient in column (4a) 0.384 by 0.313, the change in variable coefficient. Contrasting the two periods, conclusions can be drawn that an increase in outsourcing is associated with an increase in the relative demand for skilled workers, with a positive correlation between the relative employment of non-production workers.

Conversely, it is seen that there is a weak negative correlation with the change in relative average annual earnings of non-production workers and outsourcing. Hence, results on outsourcing remain ambiguous. Nevertheless, Feenstra (1998) discovers a distinct relationship between trade and technology and outsourcing. He states that ‘increase in outsourcing activity during the 1980s was in part related to improvements in communication technology and the speed with which product quality and design can be monitored, which in turn related to the use of computers’.

12 Feenstra employs the example of 1980s ‘retailing revolution’.

During the 1980s large stores had taken over the retail industry. An example in the U.S would be Walmart. Such a large firm experienced economies of scale and high profit levels. This supposed that they could afford to offer lower prices, due to outsourcing to low-wage countries, and enjoying lower costs of production. Evidently, there was a decrease in the demand for unskilled labour which caused further wage disparity. Many economists argue that the global integration of factor and product markets is only a fraction of the many reasons that have led to an impact on wages in the U.S.

Several economists argue the case for the minimum wage having a significant impact on wages. Over the past few decades the implementation of the minimum wage has had an impact on wages. ‘In the 1970s, the minimum wage amounted to about half of what the typical American worker was earning. Today, it has fallen to only 38 percent’.

13 Donaldo (1998) deduces that the setting of the minimum wage has had an impact on wage in the U.S. as well as other dynamics. The minimum wage is seen to increase wages of those whom are unskilled, hence, bridging the gap between wage income inequalities. Moreover, according to economic theory, in a monopsony market and competitive market the setting of the minimum has increased wages overall.

Another plausible reason is the influence of trade unions. As trade unions have power over wage bargaining it is believed that wage differentials have changed as a result. Adam (1998) concludes that the power of wage bargaining in the U.S had a significant impact on wages especially in the north of the U.S. Evidence shows that the power of trade unions increased over the past few decades bringing significant impacts on wages in many developed countries. Conversely, a few economists have argued that trade unions have not had such an impact on wages due to the fluctuating number of member over the past few decades, causing variations in union bargaining power.

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Machin (2002) finds that there is a clear link between graduates and wages. Wood (1994) states ‘the wages of college graduates, relative to those of workers with only a secondary education, declined in the 1970s, but rose in the 1980s’.

14 Since the 1980s the numbers of graduates have grown by around 20 percent, hence relative supply of graduates has increased. Machin (2002) finds that despite their increased numbers, the wages of more skilled workers (graduates) have not fallen relative to the less skilled (non-graduates).

The change in relative wages and employment levels can be explained by supply-side shift. Woods mentions that the main cause of a decline in college-educated labour during the 1970s was mainly due to an ever growing number of college graduates. In due course, the decrease in spending on education by the U.S government widened the skill differentials during the 1980s. After looking at economic theory and empirical evidence it is apparent that the global integration of factor and product markets has had an impact on wages in the U.S, although opinions do vary.

It is evident that there is no definite answer that integration of factor and product markets has had an impact on wages in the U.S. Evidence has demonstrated that to some extent integration of factor and product markets has impacted wage in the U.S through an increase in trade. However, these results may be ambiguous as there are other factors which enclosed an impact on wages in the U.S. since the 1970s. Technology is a key factor. Wood (1995) concludes that empirical studies carried out in developed countries indicate that trade has an impact on wages, however, technology is also the main cause which has had an impact on wages in developed countries, mainly the U.S. As mentioned above other factors are proved to be the minimum wage legislation, education, union bargaining power, outsourcing and skill differentials.

Richardson (1995) also concludes that ‘trade is a moderate contributing source of income inequality trends; it may not overshadow other sources, but it cannot be shrugged away’.

15 It may be difficult to separate trade from technology as a cause of changes in impact, but that does not point the figure at either one. The two main economic trade models that explain the impact on wages due to global integration of factor and product market integration are the Heckscher-Ohlin theory and Stolper-Samuelson theory. They argue that technological changes through trade have an impact on wages. The extent to which this is true is dependent on timing.

Since the 1970s the trade vs. technology debate has been an ongoing debate which economists are still investigating. As stated by Wood (1994) the north-south divide is still present and is further causing wage inequality.


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Feenstra, R. (1998) ‘Integration of trade and disintegration of production in the global economy’, Journal of Economic Perspectives, 12(4) 31-50. Feenstra, R. and Hanson, G. (1996) ‘Globalization, outsourcing, and wage inequality’, American Economic Review, 86(2) 240-245.

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