GEP Research Paper 08/35
A Dual Definition for the Factor Content of Trade and its Effect on Factor Rewards in US Manufacturing Sector
Agelos Delis and Theofanis P. Mamuneas
Summary
This paper introduces a dual definition of the Factor Content of Trade (FCT) and relates changes in FCT with changes in factor rewards. Our results suggest that there was no Leontief Paradox between 1967 and 1991 and that technological change is the most important determinant of wage inequality between skilled and unskilled workers in US manufacturing.
Abstract
In this paper, first we introduce a dual definition of the Factor Content of Trade (FCT) using the concept of the equivalent autarky equilibrium. A FCT vector is calculated by estimating a symmetric normalized quadratic revenue function for the US manufacturing sector for the period 1965 to 1991. The FCT for capital is positive, while the FCT for skilled and unskilled labor are both negative, suggesting that the Leontief Paradox was not present for the period of investigation. Capital is revealed by trade to be relatively more abundant compared to either type of labor, while skilled labor is relatively more abundant than unskilled labor. Then using the quadratic approximation lemma, the growth rate of the factor rewards is related to the growth rate of FCT, the growth rate of endowments and technological change. We find that technological change is the most important determinant in explaining wage inequality between skilled and unskilled workers in US manufacturing between 1967 and 1991.
JEL classification: F11, F16 and J31
Issued in October 2008
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