Trade and Wages: A Deeper Investigation

Abstract

A new presentation of the specific factors model shows how labor fares under international trade by considering how the price elasticity of the nominal wage rate responds to the terms of trade as well as factor endowments. Gains to labor are decomposed into measurable terms of trade effects and production bias effects. If trade is caused by differences in technology, trade can harm the interests of labor when the elasticities of substitution are sufficiently small. If trade is caused by differences in labor endowments, trade raises real wages in the labor abundant country, even if exports are capital intensive.trade, real wages, beta function, specific factors