Trade barriers and wage inequality in a North-South model with technology-driven intra-industry trade

Reductions in trade barriers have been suggested as a possible cause of the growing wage inequality between skilled and unskilled tabour in developed countries. Wage inequality, however, has also increased in some developing countries. Coupled with this wage inequality has been a rise in the relative employment of skilled workers. These facts are inconsistent with Stolper-Samuelson predictions concerning trade liberalization that arise in a standard two-country Heckscher-Ohlin-Samuelson (HOS) trade model. This paper presents a modified HOS model where Ricardian intra-industry trade in the skill-intensive high-tech sector is driven by international differences in adoption lags incorporating new technology. A reduction in trade barriers within the high-tech sector may lead to an increase in wage inequality in both developed and developing countries, or just one country, with a concurrent increase in the skill composition of the labour force. (c) 2004 Elsevier B.V. All rights reserved.