GEP Research Paper 99/05

Globalisation and Wages: A Tale of Two Perspectives

Matthew Slaughter

Published in The World Economy , Vol. 22 (1999), pp. 609-630.

Abstract

This paper aims to provide an overview of recent research on the causes of rising wage inequality - particularly the rising skill premium - in the United States and other countries. I argue that most recent research has used one of two methodologies: the "labour" approach or the "trade" approach. These two approaches are distinguished by their modelling of the national labour-demand schedule: from the labour perspective this schedule slopes downward everywhere, but from the trade perspective it has infinitely-elastic segments. These different demand schedules imply very different empirical strategies for analysing the causes of rising inequality. Finally, I speculate on how likely a "protectionist backlash" is in response to rising inequality. I argue that, unfortunately for proponents of free trade, such a backlash is already underway - particularly with respect to setting the terms of trade-policy debate in the United States and other countries.

Issued in April 1999.

This paper is available in PDF format .