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Article Excerpt
Abstract
This paper contributes to the discussion concerning the nature of the well-documented worsening of wage and employment inequality in western economies during the past three decades. It critically discusses the use of the traditional Heckscher and Ohlin approach to analyze the distributional effects of international competition. The paper also discusses an innovative theoretical scenario in order to effectively explain the empirical observations. The model overcomes the problem of a dichotomized labor market, which is an unfavorable result of the traditional approach. Furthermore, the factor-biased character of the technological change becomes endogenous as the strength of foreign competition and the induced incentives for technical innovations are taken into consideration. (JEL F10, F41, O33)
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Introduction
The worsening of inequality between workers of different skill levels for the past 25 years is an unquestionable fact. Slaughter [1998] reports that the premium for college-educated male workers in the U.S. rose from 30 percent in 1979 to about 70 percent in 1995. These sharply widening gaps would be less noteworthy if a sustained overall real wage increase accompanied them. Unfortunately, real wages have fallen in the U.S. by a yearly average of about 0.4 percent since 1973. Analogously, the employment of production workers in the British manufacturing sector fell between 1979 and 1992 by 41 percent, while the decrease for the non-production workers was only 26 percent. According to the existing evidence (worsening of wage and employment perspectives), the relative demand for unskilled labor fell over the last two decades. Labor supply has partly but not sufficiently adapted to prevent the increase of inequality [Hine and Wright, 1998].
Since the beginning of the 1990s, discussions about the steady worsening of employment perspectives for the unskilled workers intensified. Supporters of trade liberalization policies based their arguments on the relatively small volume of trade. Additionally, if the rising relative wages for skilled workers were to be explained by the factor price equalization theorem, one should expect an accompanied decrease in the ratio of skilled to unskilled labor in all industries. Yet, while the wage premium associated with education rose sharply since the 1970s in the U.S., the share of college-educated workers rose as well [Krugman and Lawrence, 1993; Lawrence and Slaughter, 1993]. Consequently, the main source of this development must be a skill-biased technical change. [Bound and Johnson, 1992; Berman, Bound, and Griliches, 1994; Machin, Ryan, and van Reenen, 1996].
Nevertheless, it is crucial to identify the source of this technology-skill complementarity. In fact, the character of technological development was not always a skill-biased one. The evolution through the 18th century, from artisan shops to the earliest factories, was characterized by a substitution of highly skilled individuals with physical capital and less-skilled labor [Goldin and Katz, 1998, p. 694]. Acemoglu [1998] shares the same belief by saying, "... new technologies are not complementary to skills by nature, but by design." Even current innovations like simplifying complex tasks with the use of computers, can cause the demand for skilled labor to fall. Wood [1994] regards defensive labor-saving innovation including technological progress in general, as a partial response of domestic producers to increasing foreign competition.
Failures of the Heckscher-Ohlin Approach
The Heckscher-Ohlin model is a valuable approach for defining gains from trade and specialization tendencies for each country in a world of completely open economies and with identical production technologies. However, the main problem arises as the same theoretical framework is used to examine the effects on the domestic distribution of income.
The Labor Market Dichotomy in the Heckscher-Ohlin Framework
The Heckscher-Ohlin model implies a particular picture of the labor market in relative terms [Wood, 1995, pp. 59-62]. If a country is completely open to trade, relative labor demand consists of two downward-sloping curves lying within a horizontal segment covering the range of labor endowments in which the country will not be specialized. (1) With such a crooked relative labor demand, the labor supply may only be significant for relative wages in specialized countries. The opposite is true for trade-induced changes of relative labor demand. They will affect relative wages, only for non-specialized countries with the labor supply lying within the horizontal segment of demand. According to the implications of the standard non-profit equation, relative wages can be affected either by the changes in labor supply or by trade induced shifts of labor demand. However, it can not be affected by both of them simultaneously.
Reverse Adjustments of Skill Intensity
To further evaluate the ability of standard theoretical tools in explaining distributional effects, recent developments, such as the paradigm of new competitors emerging in international markets from regions with a relative abundance of unskilled employees should be examined. The price of the unskilled, labor-intensive product will fall in relative terms, generating an analogous rise of the skill premium and thereby, a specialization tendency towards skill-intensive branches. At the same time, skill intensity decreases in both productions in order to make the skilled workers available to expand the skill-intensive sector. Nevertheless, this is not exactly what happened in previous decades. Recent developments in western economies imply the following: first, a rising skill-premium; next, specialization tendencies toward skill-intensive productions; and finally, a generalized tendency of increasing skill intensity in all branches [Francois and Nelson, 1998, p. 1491; Berman, Bound, and Griliches, 1994, p. 380].
Many authors claim that the only reason for a rising skill premium and an accompanied increase in skill intensity is a skill-biased technical change [Krugman and Lawrence, 1993; Baldwin, 1995]. Figure 1 depicts the effects of such a technical evolution that occurs simultaneously in both industries with xx and yy moving...
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