Can the Stolper-Samuelson Theorem explain relative wage movements? Evidence from Mexico

Rising wage inequality and increasing international trade have renewed interest in the empirical relevance of the Stolper-Samuelson theorem. Although a brilliant theoretical accomplishment, the Stolper-Samuelson theorem has received little empirical support. U.S. studies have generated mixed results partially because prices are endogenous in a large country. This paper examines the link between relative goods prices and relative wages in a small country: Mexico. This paper shows that on the eve of entering the GATT in 1986, Mexico protected less-skillintensive industries. Trade liberalization caused dramatic movements in product prices. Starting from the initial pattern of protection, this paper then applies three approaches to comparing the relationship between product prices and relative wages against the predictions of the StolperSamuelson theorem. Following trade liberalization, the relative price of skill-intensive goods rose, raising the between-industry demand for skilled labor and the relative wages of skilled workers. All three approaches generate consistent empirical support for the Stolper-Samuelson theorem. The author thanks Antoni Estevadeordal, Gordon Hanson, Chihwa Kao, Mary Lovely, Dave Richardson, Matt Slaughter, M. Scott Taylor, Sarah West, and participants at the 1998 Empirical Investigations in International Trade conference for helpful discussion and comments. All remaining errors are the sole responsibility of the author. Can the Stolper-Samuelson Theorem explain relative wage movements? Evidence from Mexico Abstract: Rising wage inequality and increasing international trade have renewed interest in the empirical relevance of the Stolper-Samuelson theorem. Although a brilliant theoretical accomplishment, the Stolper-Samuelson theorem has received little empirical support. U.S. studies have generated mixed results partially because prices are endogenous in a large country. This paper examines the link between relative goods prices and relative wages in a small country: Mexico. This paper shows that on the eve of entering the GATT in 1986, Mexico protected lessskill-intensive industries. Trade liberalization caused dramatic movements in product prices. Starting from the initial pattern of protection, this paper then applies three approaches to comparing the relationship between product prices and relative wages against the predictions of the Stolper-Samuelson theorem. Following trade liberalization, the relative price of skill-intensive goods rose, raising the between-industry demand for skilled labor and the relative wages of skilled workers. All three approaches generate consistent empirical support for the Stolper-Samuelson theorem. Rising wage inequality and increasing international trade have renewed interest in the empirical relevance of the Stolper-Samuelson theorem. Although a brilliant theoretical accomplishment, the Stolper-Samuelson theorem has received little empirical support. U.S. studies have generated mixed results partially because prices are endogenous in a large country. This paper examines the link between relative goods prices and relative wages in a small country: Mexico. This paper shows that on the eve of entering the GATT in 1986, Mexico protected lessskill-intensive industries. Trade liberalization caused dramatic movements in product prices. Starting from the initial pattern of protection, this paper then applies three approaches to comparing the relationship between product prices and relative wages against the predictions of the Stolper-Samuelson theorem. Following trade liberalization, the relative price of skill-intensive goods rose, raising the between-industry demand for skilled labor and the relative wages of skilled workers. All three approaches generate consistent empirical support for the Stolper-Samuelson theorem.