International Trade and the Domestic Wage Structure: Alternative Explanations

Abstract: The paper considers the "trade and wages" debate, and proposes two alternative explanations to explain the rising wage differential (relative wage of the skilled vs. the unskilled), other than the conventional Stolper-Samuelson explanation. The first is an explanation dubbed "kaleidoscopic comparative advantage": the argument is that increased labour turnover might differentially impede the human capital accumulation of the unskilled as against the skilled, leading to an alternative trade-based explanation. The second explanation is "capital-skill complementarity", drawing on the well-established empirical regularity that capital and skill are complementary with each other vis-a-vis unskilled labour. The paper builds a dynamic model, embedding this insight into a neoclassical adjustment model, and traces out the transitional dynamics and steady state.