Technology, Trade, and Wages

Considerable effort has been devoted in recent years to the description of wage structure. This research has documented a rising return to education, unobserved skill, and work experience. However, there appears to be little research into causes of the change in structure. This paper seeks to fill the gap by studying the impact of domestic technology, foreign technology, and trade on U.S. wages. A standard model of general equilibrium is presented that shows each effect tends to be opposite in sign for high and low skilled labor. We then modify the model to allow for accumulation of sector-specific skills and sectoral immobility. In this version shocks have the same direction of effect on high and low skilled workers. In the empirical work we devise measures of foreign and domestic R&D inputs for six sectors of the private U.S. economy, and of R&D outputs for twenty-four manufacturing industries. Holding time and industry effects constant we find that: (i), in most cases technology has the same rather than opposite effect on wages at both skill levels; (ii), a rise in the foreign share in world innovation or U.S. patents decreases U.S. wages; (iii), an increase in the U.S. share in world innovation or U.S. patents raises U.S. wages, especially for the less skilled; and (iv), the stock of world innovation and U.S. patents decrease real wages, especially for the less skilled. Turning to the relative skilled wage, we find that (v), the stock of world innovation or U.S. patents increases the skill differential. Holding technology constant we find mixed results for trade. Effects of trade on real wages are generally insignificant once time effects are taken into consideration. Together the findings suggest that sectoral labor immobility is an important part of the interaction between the U.S. labor market, technology, and trade. They also suggest that technology is a key explanatory element in the twists of the wage structure of recent years, and that, in and of itself, trade may not be an important determinant of real wages