Technical change, international trade and inequality

by Zhu, Chun

Technical Change, Internationd Tkade and Inequality Chun Zhu Doctor of Philosophy Graduate Department of Economics University of Toronto 2001 My dissertation examines the impact of technical change and international trade on wage inequdity between skilled and unskilled labour. 1 address a number of pwales, though one stands out. The Stolper-Samuelson t heorem predicts t hat globalization will increase inequality in developed countries (the North) while decreasing inequality in developing countries (the South). Yet this is not what we observe. Inequality has been rising even in some Southern countries! In the fi& essay 1use the Dombusch-Fischer-Samuelson va.riant of the Heckscher-Ohlin mode1 (QJE, 1980) to describe what happens when the North is the source of product innovation. 1 show how international trade creates general equilibrium incentives to transfer technology to the South. Since these tramfer incentives are greatest for the Ieast skill-intensive goods produced in the North, technology transfer reduces the relative demand for unskilled workers in the North, thus raising Nort hern inequality. nom a Southem perspective, however, t hese t ransferred technob gies are relatively skül intensive. Thus technology transfer raises the demand for skilled workers in the South, increasing Southem inequality. Contrary to the predictions of the S tolper-Samuelson t heorem, Northem product innovation induces technology tramfer of a form that raises inequality in both the North and the South. In the second essay 1 examine my theory's empirical relevance using very detailed (&digit SITC) trade data. Just as predicted by the theory, 1 document the existence of a sequence of product cycles that are associated with skill upgrsdùig (Le., increasing employment of skilled workers in production processes) in producer countries. This sets the stage for an econometric analysis of the causal impact of product-cycle-driven technology transfer on skiil upgading across 28 countries and 28 industries. Issues of country âued effects and endogeneity are addressed. The conclusion is that product-cycle-driven technology transfer can explain a significant portion of skiil upgrading in both high-incorne and middle-income countries. My t hird essay uses the Dombusch-Fischer-Samuelson variant of the Heckscher-Ohlin mode1 again to explore additional issues surroundhg exogenous Southern catch-up and skill biased technicd change. It rnakes the simple point that trade provides a channel through which Southern catch-up cm induce rising inequality not only in the South, but also in the North. Furthemore, contrary to the conventiond view, Southern catch-up will increase real national income in both the North and the South.