The relevance of the Stolper-Samuelson theorem to the trade and wages debate

In this paper we investigate the powerful implications of the Stolper-Samuelson theorem, which uses the Heckscher-Ohlin model to predict strong links between changing trade prices and wage inequalities. We summarise recent work, which shows that these theoretical links are, in fact, far stronger than indicated by empirical evidence or simplified reduced-form regressions. We point out that the literature outlines many reasons to doubt the validity of the Heckscher-Ohlin model, and summarise various general equilibrium studies of advanced countries which indicate that relaxation of the assumptions of the Heckscher-Ohlin model can greatly undermine the Stolper-Samuelson conclusions. We conclude that, while increased trade with developing countries has probably played some part in the widening wage inequalities in the UK and USA, there is considerable doubt over how large this role is. There are good reasons for believing that, contrary to the usual conclusions of the Stolper-Samuelson literature, policies to assist the upskilling of the labour force have considerable potential in offsetting any negative effects of trade on wage inequality.