Trade, Technology and U.K. Wage Inequality*

The U.K. skill premium fell from the 1950s to the late 1970s and then rose very sharply. This paper examines the contributions to these relative wage movements of international trade and technical change. We first measure trade as changes in product prices and technical change as TFP growth. Then we relate price and TFP changes to a set of underlying factors. Among a number of results, we find that changes in prices, not TFP, were the major force behind the rise in inequality in the 1980s. We also find that although increased trade pressure has raised technical change, its effect on wage inequality was not quantitatively significant. *Contact addresses: Jonathan Haskel, Economics, QMW, Mile End Rd, London E1 4NS, England; [email protected], (http://www.qmw.ac.uk/~ugte153) and Matthew Slaughter, Department of Economics, Dartmouth College, 309 Rockefeller Hall, Hanover, NH 03755, USA; [email protected], (http://www.dartmouth.edu/~mjs/). For helpful comments we thank seminar participants at the London School of Economics and Oxford University. For financial support Haskel thanks the U.K. Economic and Social Research Council for grant #R000236653 and Slaughter thanks the Russell Sage Foundation. For excellent research assistance we thank Ylva Heden.