Explaining Intra- and Intersectoral Wage Differentials in Simple General Equilibrium Trade Models

The labour markets in the developed countries have experienced two fundamental changes in recent years. Firstly, high-skilled workers have gained at the expense of low-skilled workers, which manifests itself in a rising skill premium and/or a rising disparity in the unemployment rates of these two skill groups. Secondly, sectors with low wage levels have expanded while sectors with high wage levels have contracted. By presenting two insider-outsider general equilibrium models, which analyse the impact of trade on both dimensions of income distribution, this paper seeks to contribute to the ongoing debate on whether the progressing globalisation of the world economy is to blame for these two trends. From this analysis, two important results emerge. Firstly, the distributional effects of trade are highly sensitive to even minor changes to the assumption of the 2 x 2 trade model. This suggests that due attention should be paid to the choice of the structural model. Secondly, there might be a bias inherent to the "mandated-wage approach" that makes most empirical studies fail to find a strong influence of trade on the skill premium.