Wage differential, trade, productivity growth and education

Abstract

There is a large literature on the link between wage differential, international trade and productivity growth. The theoretical and empirical research is mainly based on the Heckscher-Ohlin-Samuelson framework and on the cases of a large country. More comprehensive theoretical models are needed to guide further empirical research. This paper contributes to the debate by providing a dynamic intertemporal general equilibrium (DIGE) model incorporating endogenous skill formation. The result tends to support the argument that trade has a responsibility for wage differential. A cut in government education investment tends to raise wage differential. Productivity growth at best causes wage differential in the short run. From a theoretical perspective it is unclear whether productivity growth raises wage differential in the long run once the accumulation of skills is endogenized.