Globalization, Globalisation: Trade, Technology, and Wages (Second Version)

Abstract

This paper addresses a complex of globalization issues: the effect of globalization on the skill premium; the effect of globalization on unemployment; the relative importance of globalization and exogenous technical change; the effect of globalization on the ability of national governments to conduct independent social policies. Thinking about these topics has been dominated by a large empirical literature concluding that trade has played a relatively minor role in the rise of the skill premium, while exogenous skill-biased technical change has played a major role. This paper replaces the focus on intersectoral substitution at the heart of the Stolper-Samuelson theorem with attention to intra-sectoral relations between inputs. Specifically, I assume that out-sourcing and unskilled labor are highly substitutable and that equipment and skilled labor are complementary, that production methods are flexible, and that the country undertaking out-sourcing has a significantly different structure from that providing it. Globalization then offers a simple and immediate possible explanation for the prominent stylized facts regarding the emergence of the skill premium and for the presence of skill-biased technical change. Trade vs. technology remains as an empirical issue, though, because exogenous neutral technological change offers an alternative possible explanation.