Factor Price Equalization? the Cointegration Approach Revisited

Factor price equality across countries is an important implication of the Heckscher-Ohlin-Samuelson model of international trade. Although an influential theoretical result, the model has received surprisingly little empirical support. Burgman and Geppert (1993) argue that this might be due to the neglect of the nonstationarity property of the time series under consideration. Using a cointegration approach, they find strong evidence pointing towards a long-run relationship between factor prices in six major industrialized countries. The present paper shows, however, that there is only limited evidence of cointegration once the finite sample bias is taken into account. Moreover, there is only weak evidence of a significant cointegrating relationship when real (rather than nominal) labor cost data are used. There is some indication of long-run co-movements of real factor prices when using the statistically more powerful bivariate tests rather than a multivariate framework. JEL Classification: F15. Helge Berger CESifo (University of Munich and Ifo Institute Poschingerstr. 5 81679 Munich Germany Frank Westermann CESifo (University of Munich and Ifo Institute Poschingerstr. 5 81679 Munich Germany [email protected]