DP2732 Competition, Trade and Wages

Author(s): J Peter Neary
Publication Date: March 2001
Keyword(s): OECD Wage Inequality, Oligopolistic Competition, Skill Premia, Skill-Biased Technological Progress, Trade And Wages
JEL(s): F12, F16, J31
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2732

I review briefly the empirical evidence in the trade and wages debate, which overwhelmingly rejects the Heckscher-Ohlin explanation for recent increases in OECD skill premia. I then argue that the same evidence is also difficult to reconcile in general equilibrium with the view that exogenous skill-biased technological progress is the sole culprit. Finally, I present a model of oligopolistic competition, which is more consistent with the evidence. Removing quantitative import constraints (a metaphor for increased foreign competition) encourages both home and foreign firms to invest more aggressively, raising their demand for skilled labour even at unchanged relative wages.