The Distributional Effects of Trade on Austrian Wages

Evidence The Impact of Exports and Imports on WagesThe impact of trade on the distribution of income is usually analyzed in the framework of the Stolper-Samuelson theorem, which states that trade-induced changes in relative demand for goods will also change the relative prices of the factors used in the production of those goods.As firms specialize on producing goods for which factors are more abundant within their home country than abroad, the relative domestic prices of those factors also rise.The Stolper-Samuelson theorem has been used to explain the distribution of factor incomes, i.e. labor wages and returns on capital, but it can also be applied to analyze wage differentials between high-and low-skilled labor.With regard to the effects of trade on the distribution of wages, 3 it is assumed that countries differ with respect to their relative abundance of high-and lowskilled labor.Increasing trade between two countries should therefore cause the relative wage of low-(high-)skilled workers in a country with an abundance of high-(low-)skilled labor to decline.As high-skilled workers are on average better paid than low-skilled ones, more trade implies a more unequal wage distribution in high-wage countries and a less unequal one in low-wage countries.In its 2007 Employment Outlook, the OECD ( 2007) documents an increase in the inequality of earnings in most high-wage countries.The rise in inequality was attributable mostly to large increases at the top of the distribution, measured by the decile ratio of earnings 4 .Therefore, the OECD concluded that imports from low-skilled countries had not been the major cause for the increase in inequality in OECD member states, because those imports should have resulted in rising inequality at the lower end of the distribution.Here, it may be useful to remember that the Stolper-Samuelson theorem only discusses relative wage changes between high-and low-skilled workers, and clearly the relative wage for low-skilled labor is declining.Furthermore, the argument holds only for trade with those emerging economies where the skill level on average is far below the OECD average.This most likely cannot be applied to Austria's trade with CEECs, as there is no reason to assume that the average skill level in CEECs differs much from the Austrian standard, especially in exporting industries.According to the OECD's Education at a glance (2008), the share of working-age population having attained at least upper secondary education was higher in the Czech Republic (90%), Estonia (88%), Slovakia and Slovenia (82%) than in Austria (80%) in 2006.Furthermore, an increase in the trade volume between high-wage and lowwage countries is not a precondition for putting pressure on the low-wage sector in rich countries.Freeman (1995) stressed that the mere possibility of imports might be sufficient to depress wage growth for less skilled workers in high-wage countries.Credible threats to shift production abroad may reduce the bargaining power of unions, so that wage growth might stall without an observable increase 3 The wage distribution we are interested in is the nation-wide distribution across all sectors and firms. 4Decile ratios compare the earnings at different deciles of the earnings distribution.The D9/D1 ratio can be decomposed into D9/D5 and D5/D1 ratios, which, when examined over time, allow us to trace changes in the distribution to changes below or above the median.