Wage inequality, technology, and trade

Recent widening of the wage gap between skilled and unskilled workers has been attributed mainly to skill-biased-technical-change and to trade liberalization. This paper examines the effects of the two in a unified model, in which trade and technology adoption are endogenous. The paper has two main results. First, technical progress increases the wage gap in developed and in less developed countries, while trade liberalization increases the wage gap in developed countries but reduces it in less developed countries. The second result is that while trade liberalization increases trade in all countries, technical progress does not increase trade everywhere. These two results indicate that the recent increase in wage inequality is a combined result of both technical progress and trade liberalization, and cannot be attributed to one factor only. JEL: D3, F16, J31