Technical change, international trade and inequality

grantor: University of TorontoMy dissertation examines the impact of technical change and international trade on wage inequality between skilled and unskilled labour. I address a number of puzzles, though one stands out. The Stolper-Samuelson theorem predicts that globalization will increase inequality in developed countries (the North) while decreasing inequality in developing countries (the South). Yet this is not what we observe. Inequality has been rising even in some Southern countries! In the first essay I use the Dornbusch-Fischer-Samuelson variant of the Heckscher-Ohlin model (QJE, 1980) to describe what happens when the North is the source of product innovation. I show how international trade creates general equilibrium incentives to transfer technology to the South. Since these transfer incentives are greatest for the least skill-intensive goods produced in the North, technology transfer reduces the relative demand for unskilled workers in the North, thus raising Northern inequality. From a Southern perspective, however, these transferred technologies are relatively skill intensive. Thus technology transfer raises the demand for skilled workers in the South, increasing Southern inequality. Contrary to the predictions of the Stolper-Samuelson theorem, Northern product innovation induces technology transfer of a form that raises inequality in both the North and the South. In the second essay I examine my theory's empirical relevance using very detailed (5-digit SITC) trade data. Just as predicted by the theory, I document the existence of a sequence of product cycles that are associated with skill upgrading (i.e., increasing employment of skilled workers in production processes) in producer countries. This sets the stage for an econometric analysis of the causal impact of product-cycle-driven technology transfer on skill upgrading across 28 countries and 28 industries. Issues of country fixed effects and endogeneity are addressed. The conclusion is that product-cycle-driven technology transfer can explain a significant portion of skill upgrading in both high-income and middle-income countries. My third essay uses the Dornbusch-Fischer-Samuelson variant of the Heckscher-Ohlin model again to explore additional issues surrounding exogenous Southern catch-up and skill biased technical change. It makes the simple point that trade provides a channel through which Southern catch-up can induce rising inequality not only in the South, but also in the North. Furthermore, contrary to the conventional view, Southern catch-up will increase real national income in both the North and the South.Ph.D