Globalisation vs Skill‐Biased Technological Change: Implications for Unemployment and Wage Inequality

Abstract

Globalisation and skill-biased technological change have emerged as alternative explanations for the increase in US wage inequality since 1980. We investigate the static and dynamic effects of these shocks on unemployment across skill classes using a model of search unemployment. Although we confirm that globalisation and skill-biased technological change both lead to increases in wage inequality, we show that these shocks may have different effects on unemployment. We also show that labour market institutions play a role in determining the size of shocks, which formalises an argument in Krugman (1994) about the labour market experiences of the US and Europe since 1980. Globalisation and skill-biased technological change (hereafter, SBTC) have emerged as alternative explanations for the increase in US wage inequality since 1980. Relatively little attention has been devoted to the effects of these shocks on unemployment across skill classes. We investigate this issue in this paper. In particular, we make four contributions. First, we link search unemployment - the leading unemployment model in the macroeconomics literature - with trade theory. In our model, relative factor endowments determine comparative advantage, and relative prices act as the transmission mechanism between countries. Second, although we confirm that globalisation and SBTC both lead to increases in wage inequality, we show that these shocks may have different effects on unemployment. Third, we show that labour market institutions play a role in determining the size of shocks. In so doing, we formalise an argument in Krugman (1994) about the labour market experiences of the US and Europe since 1980. Finally, we examine macroeconomic evidence for the US and Europe and ask how well globalisation, SBTC and other explanations in the literature fit the facts.