Trade, technology and relative wages: a computable general equilibrium analysis

The cause(s) of increased wage inequality in developed nations in recent decades is a contentious issue in international economics. In the UK, the ratio of non-manual to manual wages increased by 24.4 percent between 1979 and 1999. Over the same interval, there has been an increase in the relative supply of skilled workers. This suggests that the increase in the relative wage of skilled labour has been driven by a large increase in relative demand for this type of labour. Two candidates commonly cited as the catalyst behind the demand shift are increased trade between developed countries and unskilled-labour-abundant developing nations, and technical change favouring skilled labour. This thesis contributes to the debate by evaluating the effects of trade and technology on UK wages using a computable general equilibrium framework. Modelling is aided by identifying a larger number of labour types than is the norm and estimating changes in the stocks of four different capital assets over the period of interest. The results, although sensitive to key parameter values, single out technical change as the cause of increased wage dispersion in the UK, but also raise the possibility that trade has had a significant adverse effect on the relative wage of a narrowly defined group of workers at the bottom end of the skill distribution.