Edited by William A. Kerr and James D. Gaisford
Chapter 45: International Trade and Wages
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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