An interesting contemporary research question in trade theory deals with the possibility of rising wage inequality across the globe. A few possible explanations have been provided so far. We provide a natural explanation and a rigorous proof of the phenomenon by arguing that liberalizing trade in skill-linked intermediate product is likely to increase skilled-unskilled wage gap across the globe. Our model has the feature that a trade-induced shock can reduce the price of the skill-intensive traded good and raise the skilled-unskilled wage gap at the same time.
Trade Liberalization, Skill-linked Intermediate and Two-sided Wage Gap
Draft Paper, January 2005