Effects of North–South trade on wage inequality and on human-capital accumulation

a r t i c l e i n f o JEL classification: F16 F43 J24 J31 O31 O33 Keywords: North–South trade Technological knowledge Human capital Wage inequality This paper develops an endogenous growth model with technological knowledge directed towards high-versus low-skilled labour, augmented with North–South international trade of intermediate goods and with human-capital accumulation, to analyse how trade affects wage inequality and the inter-country human-capital gap. Trade is a vehicle for inter-country technological-knowledge diffusion and human-capital accumulation interacts with the intra-country direction of technological knowledge arising from trade. In contrast with the market-size effect, stressed in the skill-biased technological change literature, the operation of the price channel following openness to trade predicts, in line with the recent trends in developed and developing countries, an increasing technological-knowledge bias towards high-skilled human capital. This, in turn, decreases inter-country gaps of technological knowledge and human capital and increases intra-country wage inequality. Also in line with recent empirical evidence, inter-country wage convergence is induced by the trade-opening level effect. Empirical evidence detects two compelling trends since the early 1980s: (i) rise in wage inequality in favour of high-skilled labour and (ii) rise in the proportion of high-skilled labour, both occurring in developed (North) and developing (South, newly-industrialized) countries, in the context of strong technological-knowledge progress and enlarged intermediate goods trade flows (e. To account for the above empirical facts, we develop an endogenous directed technological-knowledge model with North–South trade and human-capital accumulation. In the model, trade of intermediate goods is a vehicle for inter-country technological-knowledge diffusion and human-capital accumulation interacts with the intra-country direction of technological knowledge arising from trade. The two main approaches in the literature contradict at least one of the mentioned trends. The dominant trade approach (e.g., Leamer, 1998; Wood, 1995) relies on the labour-level channel through the Stolper–Samuelson theorem; i.e., a decline in the relative price of the imported good reduces the return of the factor that is used intensively in its production; however, applied to the South, it would predict a reduction of the high-skilled labour premium. relies on the market-size channel; i.e., larger high-skilled labour creates a larger demand for R&D biased towards improvements in inputs used in goods produced by high-skilled labour, thus increasing relative high-skilled wages; however, applied to trade with the South (low-skilled abundant), it would predict a reduction of the high-skilled technological-knowledge bias and, thus, of the high-skilled premium in the North. Thus, …