GEP Research Paper 03/15
Globalization and relative wages: Some theory and evidence
Joseph Francois and Douglas Nelson
Abstract
In this paper, we first present a simple theoretical model of globalization between similar countries to motivate the empirical work that follows. Specifically, we examine the linkages between trade volumes and relative wages in a specialization model along the lines of Ethier (1982). The core of the empirical analysis involves bivariate time-series analysis. There we find some evidence of a relationship between growth in intermediate goods and the skill premium, though perhaps not the evidence expected. Our results point to a link between globalization and wages, but one that benefits unskilled workers. Specifically, we find that, in all cases, increased trade volumes are associated with lower skilled wages and higher unskilled wages. That is, increased trade would seem to reduce wage inequality. The consistent sign pattern across the systems estimated strikes us as suggestive and warranting additional work.
Issued in June 2003.
This paper is available in PDF format.