Trade and Variety-Skill Complementarity: A Simple Trade-Based Resolution of Wage Inequality Anomaly

The Stolper-Samuelson theorem predicts the relative wage of high-skilled labor will increase in the U.S. but decrease in Mexico after trade, while data shows the skill premium began to rise in both countries during the 1980s. This paper presents a simple trade-based resolution of this “wage inequality anomaly.” The resolution is a straightforward application of well-known variety trade models. Intra-industry trade increases the variety of intermediate goods used by the high-skill intensive final good. If the varieties and high skill are “complements,” the skill premium rises in both countries. Evidence supports this linking of intra-industry trade to wage inequality