Winners and Losers in the Asia-Pacific
Edited by Noel Gaston and Ahmed M. Khalid
Chapter 8: Trade and Wage Inequality in a World of Incomplete Diversification
Christis G. Tombazos* INTRODUCTION The significant increase in wage inequality that has been observed over the last few decades in the United States coupled with a concurrent and equally significant expansion of trade has attracted considerable attention in the literature.1 Early research in this area relied heavily on the well-known Heckscher– Ohlin (HO) channels. However, in light of little evidence of a substantial increase in the relative price of skilled to unskilled-intensive goods it was soon concluded that the HO mechanism was an unlikely culprit (see Slaughter, 1998, for example). The potential relevance of trade in the wage inequality debate was re-introduced in the literature by the pioneering work of Feenstra and Hanson (1996a, 1996b, 1999). These authors argue that preoccupation with HO dynamics that emphasize trade in final goods obfuscates the full range of channels through which import competition impacts labor markets. They explain that imports of intermediate goods have the potential to have a significant impact on wages by fragmenting the set of production processes that typically take place within individual manufacturing industries into distinct sub-activities which are then re-allocated across countries (Feenstra and Hanson, 1996b, p. 240). In this context, Feenstra and Hanson show that to the extent that intermediate imports in the US are low-skill intensive they shift employment away from low-skill labor and contribute to wage inequality. In an effort to shed light on how trade can facilitate inequality in developing countries, Zhu and Trefler (2005) extend the general framework of Feenstra and Hanson by...
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