Wage convergence and trade

Abstract

factor price equalisation, market integration, trade and factor price, wage convergence 1 | INTRODUCTION In spite of globalisation, wage rates for similar tasks undertaken in the production of similar goods often vary substantially across countries. Even where most barriers to trade and movement of people or investment are removed, as in the European Union (EU), wage differentials persist. In this paper, we consider whether the persistence of wage differentials is due, at least in part, to the time it takes for domestic wages to adjust to external forces, particularly when trade connections are limited.A primary focus of recent empirical research on the relationship between trade and wages has been on how trade affects wage levels and skill differentials within a country (see Slaughter, 1999 for setting out the issues and see Haskel, Lawrence, Learner, & Slaughter, 2012 for a review of the literature). Our focus is different. We examine the tendency for convergence over time in wage rates for the same type of labour across countries, a focus closer to research from the 1990s focusing on the impact of trade on narrowing wage rate differentials for less-skilled workers between developed and developing countries. We examine evidence of convergence in wage rates for workers of low, medium and high skills in the same industry across countries.With regard to the earlier research, Wood (2018, p. 975) notes, "In the 1990s, after an intense debate, the economics profession concluded that increasing trade with developing countries was not substantially harming less-skilled workers in developed countries." He then discusses whether economists got it wrong in view of the assertion "that the costs of globalisation to less-skilled workers were a key cause of Brexit, Trump and political extremism in continental Europe." Our research suggests one possible explanation for the apparent failure of earlier research to provide clear evidence of substantial wage impacts, namely that the effects of trade or globalisation on domestic wages occur only slowly over time. Perhaps, the adverse impacts from decades of the growth in trade and other forms of globalisation on the wages of formerly highly paid industrial workers in the developed countries have only slowly made themselves felt, leading to the recent political reactions.With the factor price equalisation (FPE) theorem of Samuelson (1948), free trade in finished goods leads to equal relative compensation across trading partners for any productive input, albeit under a set of highly restrictive assumptions. Subsequent theorising has recognised the many obstacles to equalisation and has shifted the theoretical focus to examining the conditions under which freer trade leads to factor price convergence rather than full equalisation (see Falvey, 1999;Falvey & Kreickemeier, 2005). A recent contribution by Baldwin and Robert-Nicoud (2014) extends the analysis to the impact on wage convergence under outsourcing (trade-in-tasks) rather than trade-ingoods.Theoretical analysis of the integrati...

International Differences in Profitability*

“…Per capita incomes of many, but not all, countries are found to be slowly converging on income of the USA after controlling for differences in education, capital intensity and other factors (Dowrick & Ngyuen, 1989; Islam, 2003; Johnson & Papageorgiou, 2020). Wage rates across countries are also found to be converging towards the global mean in recent years but with many countries having elements of difference that are persistent (Egger & Pfaffermayr, 2004; Parteka & Wolszczak‐Derlacz, 2015; Zhou & Bloch, 2019). In this section, we examine the convergence of company profitability across countries.…”

“…A substantial empirical literature examines the tendency of per capita incomes to converge on the leader and shows incomes of many, but not all, countries slowly converging on the USA after controlling for differences in education, capital intensity and other factors (Dowrick & Ngyuen, 1989; Islam, 2003; Johnson & Papageorgiou, 2020). An emerging literature also looks at the convergence of wage rates across countries towards the global mean, showing a general convergence of wages over many years but with many countries having elements of difference that are persistent (Egger & Pfaffermayr, 2004; Parteka & Wolszczak‐Derlacz, 2015; Zhou & Bloch, 2019).…”

Automation and inequality with taxes and transfers

“…The modern literature exploring the determinants of wage dispersion in advanced economies expanded during the late 1980s following the deterioration in the labour market performance of low‐skill US and European workers. Surveys grounded in the Stolper‐Samuelson Theorem, have been offered, early on by Wood (1994), and recently by Gozgor and Ranjan (2017), Wood (2018) and by Zhou and Bloch (2019). The early empirical studies focussed on the links between trade and US labour market performance (Berman et al, 1994; Borjas & Ramey, 1994; Bound & Johnson, 1992; Leamer, 1996).…”

“…Surveys grounded in the Stolper-Samuelson Theorem, have been offered, early on by Wood (1994), and recently by Gozgor and Ranjan (2017), Wood (2018) and by Zhou and Bloch (2019). The early empirical studies focussed on the links between trade and US labour market performance (Berman et al, 1994;Borjas & Ramey, 1994;Bound & Johnson, 1992;Leamer, 1996).…”

Automation, the future of work and income inequality in the Asia–Pacific region

“…For example, a recent contribution by Baldwin and Robert-Nicoud (2014) demonstrates the impact on wage convergence under outsourcing (trade-in-tasks) rather than trade-in-goods. Empirical evidence suggests a convergence across countries in the wage rates of workers of the same skill group within the same industry classification (Zhou & Bloch 2017). Wage rates in developing Asia have converged towards those in advanced countries.…”