A Note on Wage Inequality, Technology, and Trade

Chu-Ping Lo

doi:10.4236/me.2011.23037

Abstract

Zeira (2007) presents a two-country model of endogenous technology and trade, illustrating that trade liberalization reduces wage inequality in developing countries. The result contrasts the current outsourcing trade literature; the conflict is due to the critical assumption made in his model that “the most rewarding technologies are invested first.” If we relax this assumption, or allow the technology frontier to foster labor gains in all existing industries, then Zeira’s model is, in fact, consistent with the current outsourcing trade literature.

Highlights

In a two-country model, Zeira (2007) shows that trade liberalization reduces wage inequality in a developing country bur increases wage inequality in a developed country
The result contrasts the current outsourcing trade literature; the conflict is due to the critical assumption made in his model that “the most rewarding technologies are invested first.”
The technological progress that occurs in the developed country generates a skill-biased technology change in the developed country, but no impact on the labor market in the developing country

Summary

Introduction

In a two-country model, Zeira (2007) shows that trade liberalization reduces wage inequality in a developing country bur increases wage inequality in a developed country. In the literature on international outsourcing trade, an increase in international outsourcing trade or technology development leads to a widening wage inequality in the developed countries and in the less developed countries. I argue that this conflict between Zeira’s (2007) model and the current outsourcing trade literature in terms of the labor market in the less developed countries, may be derived from the critical assumption in Zeira’s (2007) model: “the most rewarding technologies are invested first” and that the technology frontier is irrelevant to the developing country. If we allow “the most rewarding technologies are invested lately” or allow the technology frontier to foster labor gains in all existing industries, the wage inequality of the less developed country is.

The Zeira Model

Equilibrium

Conclusions