Trade with Asia and Skill Upgrading: Effects on Labor Markets in the Older Industrial Countries

Abstract

The trade and labour nexus is examined with a model incorporating refinements which weaken the H-O-S result that free trade can cause factor rewards to equalize. Asian growth and rising openness in the period 1970-1992, taken in isolation, are found to confer net benefits in the older industrialized countries. They cause real wages to rise there, even for production workers. Although they also cause increased wage dispersion in this period, the magnitude is small compared with the effects of biased technical change, or skill upgrading. Projections to 2010, which combine further expansion in imports from Asia with continued Northern skill-upgrading, yield declining real wages and/or unemployment for both production and farm workers. Restricting imports from Asia is found to be a costly yet ineffective response

JEL Classification: F15, J31