Shifts in U.S. Relative Wages: The Role of Trade, Technology, and Factor Endowments

Abstract

This paper investigates three hypotheses to account for the observed shifts in U.S. relative wages of less educated workers compared to more educated workers during the period from 1967 to 1992: (1) increased import competition, (2) changes in the relative supplies of labor of different educational levels, and (3) changes in technology. Our analysis relies on a basic relationship of the standard general equilibrium trade model that relates changes in product prices to factor price changes and factor shares, together with information about changes in the composition of output and trade, within-industry factor use, and factor supplies. For the period from 1967 to 1973, we conclude that the relative increase in the supply of well-educated labor was the dominant economic force that narrowed the wage gap among workers of different educational levels. In the 1980s and early 1990s, however, the wage gap between more educated and less educated workers widened sharply, despite the continued relative increase in the supply of workers with more education. We conclude that increased import competition cannot account for the observed increase in inequality among the major education groups, although it could have been a contributory cause of the decrease in the relative wages of the least educated workers. Instead, we find support for technical progress that is saving of less educated labor and that is more rapid in some manufacturing sectors intensively using highly educated labor as the dominant force in widening the wage gaps among college-educated workers, workers with a completed high school education, and workers with 1–11 years of schooling. Finally, we use the Deardorff-Staiger model, which allows changes in the factor content of trade to reveal the effects of trade on relative factor prices. Our empirical tests reinforce the conclusion that increased import competition between 1977 and 1987 was not the dominant force in widening the wage