DP3420 Foreign Competition and Wage Inequality

Author(s): J Peter Neary
Publication Date: June 2002
Keyword(s): general oligopolistic equilibrium (GOLE), skill premia, skill-based technical progress, strategic investment, 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=3420

I argue that increased foreign competition can affect technical choice and skill differentials even when actual imports do not rise significantly. I present a model of General Oligopolistic Equilibrium (?GOLE?) in which a reduction in import barriers (whether technological or policy-imposed) encourages more strategic investment by incumbent firms. The predictions accord with many of the stylised facts: higher skill premia; higher ratios of skilled to unskilled workers employed in all sectors and throughout the economy; little change in import volumes or prices; and rapid technological progress with rather little change in total factor productivity.