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Working Paper No. 471

A Schumpeterian Model of Protection and Relative Wages

Working Paper
Reference
Dinopoulos, Elias and Paul Segerstrom (1996). “A Schumpeterian Model of Protection and Relative Wages”. IFN Working Paper No. 471. Stockholm: Research Institute of Industrial Economics (IFN).

Authors
Elias Dinopoulos, Paul Segerstrom

This paper presents a dynamic general equilibrium model of trade between two advanced countries in which both innovation and skilled acquisition rates are endogenously determined. The model offers a North-North (as opposed to a North-South) trade explanation for increasing relative wage inequality. A global reduction in trade barriers increases R&D investment and accelerates the pace of technological progress. It also reduces the relative wage of unskilled workers and results in skill upgrading, if and only if R&D is the skill-intensive activity relative to manufacturing of final products. Trade liberalization does not affect domestic relative prices in either of the two countries.