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Trade Dynamics and Wage Inequality in Developing Countries: A General Equilibrium Approach

This study analyzes the impact of trade on wage inequality in developing countries using a general equilibrium model. Following Dornbusch, Fischer, and Samuelson's framework, the model examines two regions (North and South) and two labor types (skilled and unskilled). Key findings reveal that trade alone does not directly impact inequality; however, as the South's export shares shift towards more skill-intensive goods, wage inequality rises. These insights underscore the complexity of trade's role in economic disparities, emphasizing the significance of sectoral shifts in exports.

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Trade Dynamics and Wage Inequality in Developing Countries: A General Equilibrium Approach

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  1. Trade Inequality in Developing Countries: A General Equilibrium Analysis Susan Zhu (Michigan State University) Dan Trefler (University of Toronto and CIAR) June 5, 2014

  2. The Model • Follow Dornbusch, Fischer and Samuelson (1980) as closely as possible. • 2 regions, North (N) and South (S). • 2 factors, unskilled labor (L) and skilled labor (H). • Factor prices: wNL, wNH, wSL, andwSH . • Measure of inequality: wS = wHS/wLSandwN = wHN/wLN . • A continuum of goods indexed byzwith 0 < z < 1. No factor intensity reversals so that a largerzis indexes a more skill-intensive good. • CRS, perfect competition, no international barriers to trade in goods, Cobb-Douglas preferences, balanced trade.

  3. CS(wS) CN(wN) z– North exports South exports

  4. The Southern Wage Inequality Equation Southern Demand for Skilled Labour =g(z– , wS ) Southern Demand for Unskilled Labour Southern Supply of Skilled Labour = HS / LS Southern Supply of Unskilled Labour • Dependent Variable • Southern Inequality: dln(wS) • Independent Variables • Trade Cut-Off: dln(z–) • Endowments: dln( HS / LS )

  5. The Export Share Shift Equation In general equilibrium (z– , wS, wN) are endogenous. Totally differentiate the 3 g.e. equations to solve for dz– , dwS , and dwN . Dependent Variable: dz– Independent Variables: • Southern Catch-up • Endowments • dln( HS / LS ) • dln( LS / LN ) • dln( HN / LN )

  6. Measuring wS = wHS / wLS • Freeman and Oostendorp (2001) NBER database on wages by occupation and industry for 1983-97. • Use changes over the four periods 1983-86, 1986-89, 1990-93, and 1993-97. • Criterion for inclusion in dataset: • Per capita GDP below $14,000 in 1980. • Country had observations on a fixed set of manufacturing occupations for at least two periods. • Consistent data for both non-production occupations (managers, professionals, technicians, and clerks) and production occupations (craft workers, operators, and laborers). • 20 countries and 58 observations.

  7. Measuring dz–

  8. Conclusions • Exports by themselves have no impact on inequality. I devised a novel measure of the changing skill intensity of exports. • Southern catch-up shifts the South's export shares towards more skill-intensive goods. • The resulting shift in export shares increases the level of wage inequality. • Taken together, these conclusions mean that Southern catch-up has contributed to rising wage inequality in the South. • The model's exclusion restrictions are accepted by the data i.e., Southern catch-up raises wage inequality only indirectly by shifting export shares.

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