Essays on the distributional effects of North-South trade

Since the 1980s, wage inequality between skilled and unskilled workers has widened in the OECD countries. Researchers disagree on whether this is caused by increased North-South trade or by skill-biased technical change. They also disagree on how the classic Hechscher-Ohlin (HO) model should be applied to study this question. An important reason why most researchers downplay the effects of trade is that Southern exports still represent a small share of Northern GDP.; The first chapter provides a brief introduction to the skill premium controversy. The second chapter conducts a methodological assessment of this literature, with the following conclusions that challenge the conventional wisdom: (1) the factor content approach is the most legitimate and direct way to estimate the impact of trade on wages in the HO model; (2) the popular interpretation of the Stolper-Samuelson (SS) theorem misses the general equilibrium nature of the HO model and thus is a misunderstanding; (3) the "price approach" of looking at actual price data is misleading; (4) the wage effects of trade depend crucially on technology and vice versa; they are complementary rather than competing factors in explaining wage inequality. The dichotomy between trade and technology is unjustified.; The third chapter presents a general equilibrium model which shows that a small volume of imports (e.g. 1% of US GDP) induced by North-to-South outsourcing can cause the observed rise in skill premium.; The intuition is as follows. Outsourcing in effect achieves international factor mobility by combining skilled Northern workers with unskilled Southern workers in the production process. Thus it can be modeled with a conventional CES production function. With the elasticity of substitution between skilled and unskilled labor between 0 and 1, two things will happen with outsourcing: (1) unskilled employment will expand in response to lower wages in the South, thus boosting the marginal productivity of skilled Northern workers, which raises skill premium in the North; (2) as unskilled employment expands, the total wage bill of unskilled workers becomes a smaller share of output. Since this wage bill represents the value of Southern exports, its smaller share in output translates into small import penetration.