1. Trade and wages: Is globalization leading to a more unequal world?
Shafiqa Asgarova
Iacopo Maria Taddei
Andrea Cioli
Carlo Poggi

2. Index 1. Introduction: the US case
2. A review of Stolper-Samuelson Theorem
3. Critics to Stolper-Samuelson Theorem:
The China case: technology
The Mexico case: spatial dimension
Intra-industry trade effect on wages
Conclusion

3. Introduction: the US case

4. US Economy’s performance in 2006
The economy had fully recovered from the 2001 recession
2 million additional jobs between 2005 and 2006
The unemployment rate considered to be the lowest level with 4.5 %
And yet wage and salary growth was poor?

5. - Output per hour – 70% - Average real hourly wages – 4
- Output per hour – 70% - Average real hourly wages – 4.4% - Annual earnings of full time male workers – slight

6. The reasons of weak wage growth?
Globalization
Trade
Inequality
Technological changes
Changing social norms
Deindustrialization
immigration

7. US has become more integrated into the global economy
Wage growth & Trade
US has become more integrated into the global economy

8. Three type of inequality in the US
Wage inequality – increased pay differentials for workers with different levels of education, skills, experience.
Super rich inequality – increase in the home share of the very top wage earners, whose incomes are heavily related to stock market performance.
Class inequality – increase in the share of income earned by owners of capital (corporate profits).

9. Wage growth & Inequality
On average, workers were producing considerably more, yet most workers seemed to have little to show for it.
Where was the rest of the income generated by increased productivity going? The plausible explanation is associated with rising inequality as others receive bigger pieces of the income pie.

10. Income inequality
Can be measured at the level of the family and at the level of household.
Income can be affected :
By taxes and transfers
By how much people work and what they get per an hour

11. KEEP IN MIND
Keeping in mind the term inequality, we can not say it is always undesirable. Higher incomes could, of course, be derived from exploiting others and through unfair behaviour, but they could also be an appropriate reward for obtaining new skills and/or working harder in activities that also increase the welfare of others.

12. The case of International trade – income inequality in US
International trade has small share of growing income inequality. The minor role played by trade suggests that any policy that focuses narrowly on trade to deal with this problem is likely to be ineffective.
Instead the response should be :
To use tax system to improve income distribution
To set adjustment policies to deal more generally with worker and community dislocation.

13. Stolper-Samuelson Theorem
A very brief review
Stolper-Samuelson Theorem

14. H-O model
Source: Dominick Salvatore, Economia Internazionale, Vol.1. Etas; 2 edizione.

15. FPE model
Source: Dominick Salvatore, Economia Internazionale, Vol.1. Etas; 2 edizione.

16. Critics to Stolper-Samuelson Theorem

17. The China case: technology

18. Source: Data of labour income share are obtained from Hsueh and Li (1999); data for 1996 to
2003 and 2003 to 2006 are from the China Statistical Yearbook; for 2004, the data are
calculated through a cubic natural spline interpolation method. Degrees of trade dependency are
calculated based on the China Statistical Yearbook. Owing to the large portion of processing
trade in China, it is preferable to use the export dependence ratio instead of trade dependence
ratio when measuring trade openness.

19. Theoretical model
Empirical model
Both by X. Huang, S. Xu and J. Lu

20. Theoretical model
2 country, 3 sector and 3 product model
A Constant Elasticity of Substitution function
Analyse how the relative income share is affected by the technology progress in open trade

21. Relative labor income share Labor-Capital Ratio in domestic country
Ratio of technological levels

22. Factor price equalisation theorem
OPEN TRADE
Factor price equalisation theorem
Factor prices
Marginal products
Two-factor ratio

23. Large production of the world
but

24. Since after trade liberalisation so
Technology progress has a negative effect on Labour income share
Violation of Stolper-Samuelson Theorem

25. Analyzing the effect of technology on labour income share
Empirical model
Analyzing the effect of technology on labour income share

26. Panel data of 29 Chinese cities dated from 1987 to 2006:
data from Hsueh, T.-T. and Q. Li (1999), China’s National Income:1952–1995 (Boulder, CO: WestviewPress)
data from the China Statistical Yearbook and China Labor Statistical Yearbook
Four models for each period: the first tested trough the LSDV fixed effect, the second through the EGLS random effect.
Variables considered: technology progress, opening degree of trade, import, export, per capita capital, capital market opennes…

27. Main Result
Technology has a negative and significant effect on labour income share and not just on it (capital and foreign trade).

28. The Mexico case: spatial dimension

29. Mexico opens up to trade
Two stages of the Mexico’s liberalization process:
In the mid-eighties GATT inconsistent with the S-S Theorem
1994 NAFTA supports the S-S Theorem
Spatial dimension: often not considered in traditional models.
Globalization conducts to an increase in wage differentials between regions on the border with the US and the other regions of this country.

30. Initial considerations:
Mexico is unskilled labour abundant, while the US is capital and skilled labour abundant;
So, Mexico specializes in the production of goods that use intensively unskilled labour (manufacturing sector);
The closest regions to the US reduce wage inequality, while people in Mexico City are mainly employed in the service sector;
Skill premium remains elevated in Mexico City, but it reduces sharply in the border region;
Returns to school are higher in Mexico City than in the Northern regions.

31. Regions considered in this analysis
Source: Chiquiar (2008)

32. Procedure applied
Data corresponds to 1% samples of male individuals from Mexico’s and 2000 population census.
Two steps:
Region-specific changes in unskilled wages and skill premium in the period examined;
Other explanatory variables added to evaluate site-specific characteristics and the degree of exposure of each region to globalization.

33. Identification of the effects of globalization on wages

34. Source:
Chiquiar (2008)

35. Variables to measure the integration of a region in the global market
Foreign investment flows: are mainly received by the border region and are mostly concentrated in tradable activities, while they have been decreased in the Capital and are employed in non-tradable sectors.
Maquiladora are mainly concentrated in the border region and are oriented in the manufacturing production.
International migration is higher in the border and north region.

36. Intra-industry trade effect on wages

37. Traditional H-O model  growth of skill premium in OECD countries due to increase in competition, with imports from low wage producers due to globalization wrong
The last two decades witnessed a substantial increase in the volume of North-South trade but  advanced countries still trade too little with developing countries for the effects of low price imports to be quantitatively relevant.
The rise of the skill premium has also occurred in many developing countries (which runs counter H-O).
The relative price of skill intensive goods did not increase during the period of rising skill premia.
Change in relative wages, is associated with a substantial increase in the demand for skill within all industries (Skill upgrading).

38. Wage inequality is instead explained consistently with empirical evidences considering the New Trade Theory’s distributional effects of intra industry trade.
Problem: intra industry trade is trade in goods with similar factor intensities it should not have distributional effects on relative factors demand and cannot explain the evolution of skill premium
But  this result hold because we assume Cobb-Douglas preferences or perfect symmetry between sectors
On the other hand If we assume an h (elasticity of substitution) > 1 and stronger returns to scale in the skill-intensive sectors, leaving everything else equal to a standard monopolistic competition model  any increase in the volume of trade, even between identical countries, tends to be skill-biased.
Why?
Intuition: Trade expands the MKT size of the economy increasing returns- In relative terms however output increases by more in the skill-intensive sectors, since they are characterized by stronger returns to scale, and their relative price therefore decreases.
With h > 1 the demand for skill-intensive goods increases more than proportionally, raising their share of total expenditure and thus also the relative wages of skilled workers.

39. 3 Conclusions
All the trade has an impact on factor prices, not only the small volumes of North-South trade
If the skill-biased scale effect is strong enough to overcome the standard relative scarcity effect  international trade will induce wage differential in favor of skilled labor even in skill-poor developing countries.  
This model explain why during periods of rising skill premia and growing volume of trade relative prices of skill-intensive goods decline.

40. Some remarks
- The common consensus that trade has only modest effects on inequality rests on relatively old data.
- There is good reason to believe that the apparent sophistication of developing country exports is largely a statistical illusion created by the phenomenon of vertical specialization
- How can we quantify the actual effect of rising trade on wages? Given the current state of data we can’t.

41. Political issues
Globalization oversold, ignoring inequality and insecurity
Dani Rodrik (1997, 2011) and Joseph Stiglitz (2017) predicted a populist
backlash against globalization
Anyway the more serious among the critics of globalization acknowledge that populist initiatives to “take back national control” of economic life tend to be either :
futile  most nation states have lost the power to stand alone on regulating business and technology in their territories
- without benefits for the losers of globalization
How to tackle social problems created by inequality not explored by economists because the discipline has neglected distributional issues for several decades

42. Possible solutions
No market for compensation that would automatically co-evolve with globalization
the assessment and redistribution of (some) gains from trade are political issues to be regulated by the state
What does compensation mean in this context?
Tax-based transfers of payments that take the character of rents?
Or tax revenues used to minimize losses from globalization by reactivating the losers?
If so, which combinations of social insurance and measures to enhance the skills, flexibility, and mobility of the unemployed?
Germany and Sweden “varieties of capitalism”

43. German ordoliberalism
German economy is usually a «social market economy» (Goldschmidt and Wohlgemuth 2008; Stützel et al. 1982). It stresses individual responsibility in terms of two principles:
-full competition in free trade
-subsidiarity in taking and sharing related risks
Protect society from political extremism:
- Stable money and equal opportunities for increasing living standards
through free trade
- Statutory social insurance (employers’ contributions and tax subsidies)
The aim of ordoliberal policies:
minimize job losses (through free public education and support for small
& medium enterprise)

44. Swedish welfare statism
The Swedish model set a high value on the principles of equity and solidarity.
While “equal opportunities” in Germany equality levelling the playing field
“equity” and “solidarity” in Sweden- more comprehensive support for those who cannot win in the game.
The aim is to reduce disparities between vulnerable parts of the population and those who are doing well.
In the classical Swedish model of the post-war era, this was achieved by a combination of redistributive wage and tax policies with active labor market policies (Erixon 2010; Lundberg 1985).
reconsider “equal pay for equal work”

45. Despite some erosion of their respective welfare systems, Germany and Sweden are countries where relatively low-income inequality appears to remain compatible with strong economic performance and openness to trade.

46. Conclusion
International trade and globalization cannot and should not be stopped by single governments.
The aim is to create a safeguard plan to protect the losers of globalization.

47. References
Chiquiar Daniel, Globalization, regional wage differentials and the Stolper-Samuelson Theorem: Evidence from Mexico. Journal of International Economics 74 (2008)
Huang Xianhai, Xu Sheng, Lu Jing, Trade liberalisation and labour income share variation: an interpretation of China’s deviation from Stolper-Samuleson Theorem. The World Economy, Vol. 34, Issue 7, pp
Krugman Paul, Trade and Wages, Reconsidered. Brookings Papers on Economic Activity, Vol.39, Issue 1 (Spring),
Lawrence Robert, Blue-collar blues: is trade to blame for rising us income inequality? Policies Analyses in International Economics, Vol. 85, pp
Trautwein Hans-Michel, Inequality and trade: Some insights from the history of economic thought. The International Trade Journal, 33:1.

48. Thanks for the attention!