Foreign Competition and Wage Inequality

Abstract

I argue that increased foreign competition can affect technical choice and skill differentials even when actual imports do not rise significantly. I present a model of General Oligopolistic Equilibrium (GOLE) in which a reduction in import barriers (whether technological or policy-imposed) encourages more strategic investment by incumbent firms. The predictions accord with many of the stylised facts: higher skill premia; higher ratios of skilled to unskilled workers employed in all sectors and throughout the economy; little change in import volumes or prices; and rapid technological progress with rather little change in total factor productivity.

Keywords: General oligopolistic equilibrium (GOLE), skill-based technical progress, skill premia, strategic investment, trade and wages

JEL Classification: F12, F16, J31