Demand Side Considerations and the Trade and Wages Debate

15 Pages Posted: 16 May 2000 Last revised: 22 Dec 2022

See all articles by Lisandro Abrego

Lisandro Abrego

International Monetary Fund (IMF)

John Whalley

University of Western Ontario - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for International Governance and Innovation (CIGI)

Date Written: April 2000

Abstract

Recent trade and wages literature focuses on whether trade or technology has been the major source of increases in wage inequality in OECD countries since the 1980s. In this literature, no attention has been paid to demand side considerations. Using a simple heterogeneous goods trade model of the Armington type, and UK data, we show how trade shocks affecting the price of unskilled-intensive goods can be absorbed on the demand side, with little or no impact on relative wage rates. No wage impact occurs if the elasticity of substitution in preferences between imports and import substitutes is one. As this elasticity increases, trade plays an ever larger role in explaining wage inequality changes, and as the elasticity goes below one the sign of the effect changes. We suggest that since many import demand elasticity estimates are in the neighbourhood of one, there is a prima facie case that demand side considerations further lower the significance of trade as an explanation of recent trends in OECD wage inequality -beyond that reported in recent literature.

Suggested Citation

Abrego, Lisandro and Whalley, John, Demand Side Considerations and the Trade and Wages Debate (April 2000). NBER Working Paper No. w7674, Available at SSRN: https://ssrn.com/abstract=228148

Lisandro Abrego

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

John Whalley (Contact Author)

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5B8
Canada
519-661-3509, ext. 83509 (Phone)
519-661-3666 (Fax)

HOME PAGE: http://www.ssc.uwo.ca/economics/faculty/

National Bureau of Economic Research (NBER)

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CESifo (Center for Economic Studies and Ifo Institute)

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Germany

HOME PAGE: http://www.CESifo.de

Centre for International Governance and Innovation (CIGI) ( email )

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Canada

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