Determinants of sectoral average wage and employment growth rates in a specific factors model with production externalities and international capital movements

Abstract

The cost-minimization part of a specific factors model with perfect capital movements and production externalities for both perfect and imperfect competition is used here to explain the growth rate of wages as a function of technical change, terms of trade or import changes, interest rate changes and the growth rate of the labour supply. Our estimation of the perfect competition model for 67 combinations of countries and sectors yields the result that technical change explains a higher percentage of both wage and employment growth than changes in the terms of trade do before the 1980s. From the 1980s onwards international trade is slightly more influential than technical progress. Much more important than these two are changes in the sector specific labour supply in all countries but the UK. In the UK terms of trade changes matter most. However, since we cannot exclude increasing returns, a model with imperfect competition is also estimated. Results support those from perfect competition. Ultimately, as compared to other literature, we identify some more sectors that seem to have been negatively affected by international trade. Finally, we consider policy conclusions.