Trade, technology, and wages

In Chapter 1, we analyze the relative rise of wages for high-skilled workers over the last three decades, which has been the subject of intense academic and popular scrutiny. In particular, this paper develops a new methodology for decomposing wage changes into three sources: outsourcing, biased technological change, and total biased technological change. We find that between 1980 and 1999 the change in outsourcing accounts for 28 percent of the observed wage change, and biased technological change for another 15 percent in the US. Jointly these two forces (total biased technological change) explain 58 percent of the wage change. In sum, we find that outsourcing and biased technological change can account for a large share of the observed divergence in the skilled wage premium.; In Chapter 2, we use part of the above methodology in order to assess the effects of increased outsourcing on the relative demand for skilled and unskilled labor. It is crucial to understand whether outsourcing is a complement or a substitute for each kind of labor. Using the traditionally employed log-log framework, Amiti and Wei (2006) find that outsourcing of goods and labor are complements. Using the same methodology but differentiating between skilled and unskilled labor, one would conclude that outsourcing acts as a complement to unskilled labor but as a substitute for skilled labor. This paper proposes an improved methodology which uses estimated prices for outsourcing instead of other proxies (such as its intensity) and a complete factor cost-share system of equations to find the completely opposite result, that is, outsourcing is a substitute for unskilled labor and a complement for skilled labor. This result is consistent with the findings of the literature on outsourcing and the wage gap.; Chapter 3 deals with trade balances fluctuations and its origins. International Macroeconomics has long sought an explanation for current account fluctuations that matches the data. The approaches have typically focused on better models and new macroeconomic variables. We demonstrate the limitations of this approach by showing that idiosyncratic firm level shocks are an important cause of macroeconomic volatility even for large countries. When explaining these fluctuations, standard macroeconomic models generally assume that firms are small and that their microeconomic shocks cancel out. We show that the high degree of concentration of bilateral trade flows means that idiosyncratic shocks can have a significant impact on aggregate economic fluctuations. We theoretically develop a decomposition of the variance of trade flows into its macroeconomic and its microeconomic components. Taking the model to data on bilateral trade flows from 1970 to 1997, we find that the most comprehensive macroeconomic model can only account for at most half of the observed variance in trade account volumes of each country. Thus, this paper highlights the importance of considering disaggregated data when modelling the current account.