Handbook on International Trade Policy
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Handbook on International Trade Policy

Edited by William A. Kerr and James D. Gaisford

The Handbook on International Trade Policy is an insightful and comprehensive reference tool focusing on trade policy issues in the era of globalization. Each specially commissioned chapter deals with important international trade issues, discusses the current literature on the subject, and explores major controversies. The Handbook also directs the interested reader to further sources of information.
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Chapter 45: International Trade and Wages

Eugene Beaulieu


Eugene Beaulieu Introduction This chapter presents an overview of how international trade affects labor markets and surveys the recent literature on trade and wages. In the early 1990s researchers observed an increased wage differential between skilled and unskilled workers in the US coinciding with an expansion in American trade. These two developments led to a lively debate over the impact that trade had on wages and labor markets. A conclusion, which developed fairly early in the debate, was that technological change had more to do with increased wage inequality than international trade. This line of thinking seemed to be supported by the emerging evidence that wage inequality was increasing in both developed and developing countries. A standard proposition in international trade theory known as the Stolper–Samuelson Theorem predicts that wage inequality should increase due to trade in skill-abundant developed countries but should decline in skill-scarce developing countries. The theoretical and empirical literature has evolved and there are several recent theoretical explanations of how international trade may increase wage inequality in both developed and developing countries. Meanwhile, technological change continues to be an important part of the story. Although the chapter provides some discussion of trade and wages around the world, the focus is primarily on North American countries. Edward Leamer and James Levinsohn (1995: 1341) have remarked: The first message is: ‘Don’t take trade theory too seriously’. In practice this means ‘Estimate, don’t test’ . . . Our second piece of advice points in the opposite direction: ‘Don’t treat the...

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