Sector-specific factors and the trade and wages debate

2009-02-10T14:34:12Z (GMT) by Huw Edwards
I outline the potential implications of sectoral factor immobility for the debate on the effects of low-wage competition on wage inequality in advanced countries. In theory, the presence of sector-specific factors serves to damp the magnification effect of World traded prices upon relative wages, by reducing the shift of output from unskilled-intensive to skilled-intensive sectors, and Edwards and Whalley (2007) have shown that only modest amounts of fixed factors are required to alter results qualitatively. There is evidence among OECD countries of a negative relationship between the structural decline of manufacturing since 1970 and increasing wage inequality: it is argued that the less flexible labour market institutions in Continental Europe may have mitigated the downward pressure on unskilled wages by this route, particularly if factor depreciation is of an ongoing maintenance cost variety.