A Dual Definition for the Factor Content of Trade and its Effect on Factor Rewards in US Manufacturing Sector

Abstract

In this paper, first we introduce a dual definition of the Factor Content of Trade (FCT) using the concept of the equivalent autarky equilibrium. A FCT vector is calculated by estimating a symmetric normalized quadratic revenue function for the US manufacturing sector for the period 1965 to 1991. The FCT for capital is positive, while the FCT for skilled and unskilled labor are both negative, suggesting that the Leontief Paradox was not present for the period of investigation. Capital is revealed by trade to be relatively more abundant compared to either type of labor, while skilled labor is relatively more abundant than unskilled labor. Then using the quadratic approximation lemma, the growth rate of the factor rewards is related to the growth rate of FCT, the growth rate of endowments and technological change. We find that technological change is the most important determinant in explaining wage inequality between skilled and unskilled workers in US manufacturing between 1967 and 1991.

Keywords: Factor Content of Trade, relative wages, Leontief Paradox, skilled and unskilled labor, revenue function

JEL Classification: F11, F16, J31