Trade and Wages : What Can Factor Content Tell Us?

The relationship between trade and wage inequality will remain an important and contentious issue. Economists should, therefore, be able to empirically address this issue on a firm theoretical basis. Empirical research on trade and wages in one way or another often relies on the use of so-called factor contents. While trade economists have long been using factor contents to test the factor proportions theory of comparative advantage, they are generally quite critical of this more recent applicaton in which factor contents are relied upon to infer factor price effects of trade. Following up on a recent debate, this paper argues that in discussing the usefulness of factor contents one should separate two issues: a) The information content of factor contents as such, and b) the design of specific thought experiments in which this information content may be exploited in an empirical context. The paper first delineates the information content of factor contents in a reasonably general way, without any specific thought experiment in mind. It then shows how one may design useful thought experiments involving various counterfactual equilibria, and how these counterfactuals must be interpreted