Non-homothetic preferences: Explaining unidirectional movements in wage differentials

This paper explores the impact of trade on the relative returns to skill in the presence of non-homothetic preferences. In a general equilibrium model of trade in differentiated products, it is shown that, if consumers react to a rise in real income by increasing their demands of the relatively skill intensive commodity/ies, then real income gains associated with trade, increase the skilled–unskilled wage ratio. This result generalizes to trade driven by comparative advantages and to technological progress.