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ECN353 International Economy

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Introduction

ECN353 International Economy Has global integration of factor and product markets since the 1970's had a significant impact on wages in either developed or developing countries? The integration of goods, technology, labour and capital has been an on going process over the past century. This has led to the phenomenon now known as globalisation. For several developed economies the most imperative decade for globalisation since World War II was the 1970s, when the proportion of trade to output increased in both developed and developing economies in the wake of the two oil shocks. Technological evolution has improved transport and communications, enhanced information awareness and information processing, and has set the stage for novel products and innovations. These developments make it much easier for national markets to be globally integrated. Conversely, Feenstra (1998), states that 'the rising integration of world markets has brought with it a disintegration of the production process, in which manufacturing or services activities done abroad are combined with those performed at home'.1 Consequently, we observe contradictory arguments discussing the impact of global integration of factor and product markets. A study carried out by Katz and Murphy (1992), argues that 'wage inequality among both men and women increased substantially in the United States during the 1980's'.2 'In addition, employment shares of manual and production workers have declined in favour of skilled workers, and structural unemployment has risen'.3 By focusing on developed countries, primarily the United States (U.S), evidence will be extracted to deduce whether the occurrence of global integration has had a significant impact on wages since the 1970's. It is understood that global integration of factor and product markets has led to increases in quantity of trade between countries in the last forty years. This is due to easier capital mobility, improved infrastructure as well as innovation of new technology. Moreover, it is later confirmed by a traditional trade model known as the Heckscher-Ohlin model. ...read more.

Middle

and Machin (1999)). Sachs and Shatz (1994) and Haskel and Slaughter (2001) explore the case for the U.S. and uncover a comparative increase of prices of products concentrated in skilled labour as an outcome of global integration. In addition, Leamer (1994) also finds an increase of relative prices of products concentrated in skilled labour, and a decrease of relative prices of sectors concentrated in unskilled labour for the U.S. during the 1970s, at what time there was a large increase in American imports. On the other hand, Lawrence and Slaughter (1993) and Bhagwati (1991) do not find a clear trend in relative prices of goods in the U.S. during the 1980s. Hence, an impact on relative wages is not revealed. Nonetheless, Revenga (1992) measured the impact of changes in imports on wages in the U.S. and established that the prices of imported goods had diminutive effects on wages. Furthermore, Feenstra and Hanson (1994) uncovered results via U.S. series for exports, imports, and domestic prices, published by the Bureau of Labour Statistics. They found that trade hadn't lowered the price goods produced by relatively low income labour. In addition, 'U.S. domestic prices have risen relative to U.S. import prices of all categories, at least since the strong dollar of the early 1980s'.8 Subsequently, evidence implies that trade prices contributed to wage inequality in the U.S. Indeed, the global integration of factor and products markets has shown some impact on wages, however, there are other plausible reasons that have had a significant impact on wages. Several economists claim that 'technological innovation is a more plausible explanation for the shift towards skilled labour'.9 Lawrence and Murphy (1992) conclude that it is technological progress and innovation which has led to an increase in demand for skilled workers, whilst reducing the demand for unskilled worker. Hence, there has been an increase in wage inequality between skilled and unskilled workers, due to greater than before, substitution of unskilled workers for technologically advanced capital machinery. ...read more.

Conclusion

In due course, the decrease in spending on education by the U.S government widened the skill differentials during the 1980s. After looking at economic theory and empirical evidence it is apparent that the global integration of factor and product markets has had an impact on wages in the U.S, although opinions do vary. It is evident that there is no definite answer that integration of factor and product markets has had an impact on wages in the U.S. Evidence has demonstrated that to some extent integration of factor and product markets has impacted wage in the U.S through an increase in trade. However, these results may be ambiguous as there are other factors which enclosed an impact on wages in the U.S. since the 1970s. Technology is a key factor. Wood (1995) concludes that empirical studies carried out in developed countries indicate that trade has an impact on wages, however, technology is also the main cause which has had an impact on wages in developed countries, mainly the U.S. As mentioned above other factors are proved to be the minimum wage legislation, education, union bargaining power, outsourcing and skill differentials. Richardson (1995) also concludes that 'trade is a moderate contributing source of income inequality trends; it may not overshadow other sources, but it cannot be shrugged away'.15 It may be difficult to separate trade from technology as a cause of changes in impact, but that does not point the figure at either one. The two main economic trade models that explain the impact on wages due to global integration of factor and product market integration are the Heckscher-Ohlin theory and Stolper-Samuelson theory. They argue that technological changes through trade have an impact on wages. The extent to which this is true is dependent on timing. Since the 1970s the trade vs. technology debate has been an ongoing debate which economists are still investigating. As stated by Wood (1994) the north-south divide is still present and is further causing wage inequality. ...read more.

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