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Trade and Technology as Competing Explanations for Rising Inequality

An Endogenous Growth Perspective

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Wolf-Heimo Grieben

Since the late 1970s, wage inequality between skilled and unskilled workers has risen significantly in most OECD countries. This study thoroughly discusses and evaluates the three dominant approaches to explain this finding: trade liberalization towards developing countries, skill-biased technical change, and trade-induced skill-biased technical change. In particular, the author develops a two-country North-South Schumpeterian growth model without scale effects, and analyzes general equilibrium effects of trade, education and labor market policies. Moreover, this framework is also used to analyze whether rising low-skilled unemployment in Europe is just the flip side of the coin of rising wage inequality in the US.
Contents: The trade-based explanation of rising inequality: the Stolper-Samuelson argument – The technology-based explanation of rising inequality: sector bias versus factor bias – Sector-biased FNTC in a closed economy with endogenous growth – A Schumpeterian North-South growth model of trade and wage inequality – Wage inequality and unskilled unemployment: two sides of the same coin? – Lessons about trade- and technology-based explanations of rising inequality.