Technological progress and wages in international trade

Abstract

How does technological progress change wages? International trade and development models give very different answers. The bias of the progress, the factor intensities, and the relative sizes of the sectors each matter in different models. One needs a general model to fully understand how these interact. The purpose of this paper is to provide that general model and to see the relative importance of these three determinates. The three models used here are the Heckscher-Ohlin model, the specific factors model, and the surplus labor model. Consider a two-good, manufacturing and agriculture, model. Assume technological progress in the manufacturing sector. In the small country Heckscher-Ohlin model, wages rise if and only if the manufacturing sector is relatively labor intensive. The sector sizes and the bias of the progress are irrelevant [Findlay and Grubert, 1959]. The specific factors model also uses two sectors, but with three factors, as in Jones [1971]. Manufacturing uses capital and labor; agriculture uses land and labor. In this model, the bias of the progress and other terms determines if wages rise or fall. Wages rise if the demand for labor in the manufacturing sector rises. The relative sizes and the factor intensities are not important [Neary, 1981; McCulloch, 1976]. The Lewis [1954, 1958] surplus labor model assumes a large subsistence or agricultural sector and a small capitalist or manufacturing sector. Labor is the only factor used in both sectors. As manufacturing is small, any change in the demand for labor because of progress in manufacturing is too small to change the wage level in the economy. The relative sizes of the sectors is all-important; the bias ~or factor intensities do not matter. Each model emphasizes a different determinate of the wage change. In determining the effect of technological progress on wages, there are evidently at least three considerations: the factor intensities, the relative sizes, and the bias of the progress. By considering the general case, one can see how these three interact. The results of this paper show that each determinate dominates at different relative sector sizes. Say manufacturing is very small. Then, the Lewis model holds and there is little or no effect on wages. With a slightly larger manufacturing sector, the HeckscherOhlin result appears. If manufacturing is capital intensive, wages fall with progress. As manufacturing grows further, the bias of the progress matters more, and the specific factors result appears. Then, wages are more likely to rise.