Between 1959 and 1973, when U.S. wages were rising steadily, command GNP per worker-hour did grow slightly faster than real GNP per hour -- 1.87 percent per year versus 1.85. Between 1973 and 1990, as real wages stagnated, command GNP grew more slowly than output, 0.65 percent versus 0.73. Both these differences, however, are small. The great bulk of the slowdown in command GNP was caused by the slower growth of real GNP per worker -- by the purely domestic impact of the decline in productivity growth.
If foreign competition is neither the main villain in the decline of manufacturing nor the root cause of stagnating wages, has it not at least worsened the lot of unskilled labor? Economists have generally been quite sympathetic to the argument that increased integration of global markets has pushed down the real wages of less educated U.S. workers.
Their opinion stems from a familiar concept in the theory of international trade: factor price equalization. When a rich country, where skilled labor is abundant (and where the premium for skill is therefore small), trades with a poor country, where skilled workers are scarce and unskilled workers abundant, the wage rates tend to converge. The pay of skilled workers rises in the rich country and falls in the poor one; that of unskilled workers falls in the rich country and rises in the poor nation.
Given the rapid growth of exports from nations such as China and Indonesia, it seems reasonable to suppose that factor price equalization has been a major reason for the growing gap in earnings between skilled and unskilled workers in the U.S. Surprisingly, however, this does not seem to be the case. We have found that increased wage inequality, like the decline of manufacturing and the slowdown in real income growth, is overwhelmingly the consequence of domestic causes.
That conclusion is based on an examination of the evidence in terms of the underlying logic of factor price equalization, first explained in a classic 1941 paper by Wolfgang F. Stolper and Paul A. Samuelson. The principle of comparative advantage suggests that a rich country trading with a poor one will export skill-intensive goods (because it has a comparative abundance of skilled workers) and import labor-intensive products. As a result of this trade, production in the rich country will shift toward skill-intensive sectors and away from labor-intensive ones. That shift, however, raises the demand for skilled workers and reduces that for unskilled workers. If wages are free to rise and fall with changes in the demand for different kinds of labor (as they do for the most part in the U.S.), the real wages of skilled workers will rise, and those of unskilled workers will decline. In a poor country, the opposite will occur.
All other things being equal, the rising wage differential will lead firms in the rich country to cut back on the proportion of skilled workers that they employ and to increase that of unskilled ones. That decision, in turn, mitigates the increased demand for skilled workers. When the dust settles, the wage differential has risen just enough to offset the effects of the change in the industry mix on overall demand for labor. Total employment of both types of labor remains unchanged.
According to Stolper and Samuelson’s analysis, a rising relative wage for skilled workers leads all industries to employ a lower ratio of skilled to unskilled workers. Indeed, this reduction is the only way the economy can shift production toward skill-intensive sectors while keeping the overall mix of workers constant.
This analysis carries two clear empirical implications. First, if growing international trade is the main force driving increased wage inequality, the ratio of skilled to unskilled employment should decline in most U.S. industries. Second, employment should increase more rapidly in skill-intensive industries than in those that employ more unskilled labor.