Trade, Wages, and Specific Factors

Abstract

In this paper, we use a multi-sector specific factors model with sector-specific capital and two mobile factors, production and non-production labor, to examine the effects of globalization on the skill premium in U.S.\ manufacturing industries. A key feature of this model is that factor-price insensitivity does not hold, and thus endowment changes and factor-specific technological change affect relative factor returns, and hence the skill premium. Using this model and data for the U.S. manufacturing sector from 1958-94, we calculate changes in the skill premium and then carry out a decomposition to identify the changes caused by globalization, technological progress, and endowment changes. We find the model to be an accurate predictor of both the direction and magnitude of changes in the skill premium. The decomposition reveals that globalization effects, working through product price changes, were small in magnitude and caused the skill premium to decline during the '70s and '80s. In contrast, changes in capital endowments had a strong positive effect on the skill premium throughout the entire sample period. Sector specific and production labor specific technological change also had a positive impact on the premium, while non-production labor specific technological change increased the premium in all decades. Finally, changes in labor endowments caused a decline in the premium during all three decades.