Does Trade with Low-wage Countries Cause Wage Inequality?

This paper investigates the question as to whether trade with low-wage countries has contributed to wage inequality in high-income countries, as predicted by the Stolper-Samuelson theorem. The analysis is undertaken within the framework of a simple two-sector model. A major innovation of the study is to incorporate the role of trade barriers and subsidies in inducing skill-augmenting technological changes in import-affected sectors and, hence, in reducing the demand for and wages of unskilled labor. In particular, factor bias arising from the move toward capital- and skill-based production may have contributed to other trends in wage inequality. The paper finds that trade pressures alone could not have been much of a reason for pronounced wage inequality.