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Labour market outcomes

These findings are certainly significant, but their foundations are too controversial. A better analysis is based on the mandated wage methodology, because of its closer relationship with underlying theory. This approach builds on Jone’s (1971) demonstration that the proportional change in a commodity price will be equal to a weighted average of proportional change in factor prices (Greenway and Nelson, 2000). In any case, the overall conclusion of the most of the works, with the exception of Wood, is that technological change is a more likely cause of the rising skill gap, both of unemployment and wage, than trade. Still, it must be noted that almost every meaningful work refers to the situation of industrialized countries, whether in relation of trade with each other or with the developing countries.

A more complete understanding of the issue is possible if we take into consideration an interesting complement to the econometric analysis: the computational analysis. One strategy consists of simple computational general equilibrium models to generate “back of the envelope” estimates of relevant magnitudes. A further one comprises large-scale computational general equilibrium models to stimulate the relationship between trade shocks and labour market outcomes.

Examples of the former application come from Krugman (1995), and Francois

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and Nelson (1999). The results are not clear-cut, but they seem to give more weight to the skill-biased technical change as en explanation of the skill gap in the unemployment level. As for the second strategy, an important result is obtained by Tyers and Yang (1998). The authors consider the effects of trade and skill-biased technical change on factor returns, finding, again, that the latter was a predominant cause of the increased skill premium.

Nonetheless, as already mentioned, Wood has slightly discordant and original ideas. He believes, according to most of the studies we have examined, that the rise in the relative demand for skilled labour during the past two decades was caused by the skill-biased technical change, that is the same force that had propelled it upward over the previous century. However, at the same time, he believes that most of the acceleration in the growth rate of the relative demand for skilled workers in the past two decades above its trend of the previous few decades, and hence the rise in labour market inequalities, was caused by globalization.

In practice, he thinks that the scope for conflict between trade and technology views is much narrower than is usually supposed, being confined to the causes of the acceleration of the rate of growth of the relative demand for skilled labour (Wood, 1998). Wood largely bases his analysis on the Heckscher-Ohlin model with skilled and unskilled labour as the two factors and North (developed) and South (developing) as the two countries.

Trade with the South causes the North to specialize in the production of skill-intensive manufactures, in which it has a comparative advantage because of its relatively large supply of skilled labour, and to reduce production of labour-intensive manufactures. In the North, there is a rise in the relative price of skill-intensive goods and the relative demand for skilled labour, and a widening of the wage gap between skilled and unskilled workers, and vice versa in the South (Wood, 1998). Then, he critically reviews the empirical research on the field, concentrating on: country-level panel data studies, factor content calculations, changes in relative prices, and changes in sectoral skill intensity, productivity and employment. In this way he shows that all the results are not incompatible with the globalization supposition.

Finally, he concludes his analysis by answering the following, well known and debated question. “Was the recent acceleration of the long-term trend rise in the relative demand for skilled labour caused mainly by falling barriers to international transactions or mainly by unrelated changes in technology?” In his opinion, the empirical evidence does not rule out either of these explanations, but on balance seems to give more support to the globalisation hypothesis.

He continues, “the country-level panel data studies and factor content calculations suggest that the impact of more trade with the South was big enough to explain the acceleration of demand growth; and the price studies and cross-sectoral studies of skill intensity, productivity and employment, though they do not actively support the globalisation hypothesis, are not inconsistent with it, either. There is plenty of evidence that skill-biased technical change has raised the relative demand for skilled workers, but much less evidence of an autonomous acceleration in its pace over the past two decades.”

In my personal opinion, all the aforementioned studies present valid and logical explanations to the evidence that in almost all developed countries, since about 1980, the gaps between skilled and unskilled workers in wages and/or unemployment rates have widened. Moreover, there is also a moderate consensus on the main general reasons for that. As far as the debate globalization – skill-biased technical change is concerned, I believe that further research is fundamental to shed light on it.

The first obstacle to draw a definite conclusion is that the evidence available so far is almost exclusively for the USA and the other developed countries (Greenway and Nelson, 2000). Secondly, as indirectly noticed by Wood (1998), it must be considered that trade and technology interact; more research based on this assumption is required. Finally, and I believe most importantly, trade is just one dimension of globalization, and the impact of factor movements on labour market outcomes is not yet well understood.


E&S, Chapter 14; C & Z, Chapters 3, 8 and 9; ALC, Chapters 16 and 17; RB, Chapters 1, 7 & 8; GW, Chapters 1, 2 and 5; DWG, Chapters 5, 6 and 8

Greenaway, D. & Nelson, D. “Globalization and Labour Market Adjustment”, OXREP, 16(3), Autumn 2000

Mincer, J. “Edication and Unemployment”, NBER Working Paper No. 3838, September 1991

Mortensen, D. & Pissarides, C. “Unemployment Responses to Skill-biased Technology Shocks”, EJ, 109(455) April 1999

Nickell, S., Nunziata, L. & Ochel, W. “Unemployment in the OECD since the 1960s”, EJ, January 2005

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