And Now for Something Completely Different

The dramatic growth of U.S. wage inequality since the early 1970s has been the subject of intense controversy both among economists and between economists and the broader public. To many people-including a few economists (e.g. Leamer 1995)-the explanation of that increased dispersion seems obvious: it is the result of globalization, and specifically of the growing imports of labor-intensive manufactures from developing countries. However, there are serious difficulties with an explanation of growing inequality that places the main weight on trade. For one thing, despite recent growth the value of North-South trade is still fairly small compared with the GDP of advanced economies; this means that even a complete elimination of that trade would, given reasonable estimates of factor shares and elasticities of substitution, reverse only a fraction of the observed change in wage differentials (Krugman 1995). Moreover, while trade can raise the relative demand for skilled labor by shifting the production mix toward skill-intensive sectors, in reality most of the rise in the relative employment of highly educated workers has taken place not via a change in the sectoral mix but via a shift toward such workers within sectors-a shift that has taken place despite a sharp rise in education premia, which should have induced firms to substitute away from college-educated workers (Lawrence and Slaughter 1993). But if globalization didn't do it, what did? An explanation that is consistent with the data is skill-biased technological change, taking place simultaneously in many sectors (and also presumably in many countries). And this is in fact the explanation that has been advanced by a number of economists, myself included, as the best available answer.