International Trade, Technology, and the Wage Gap: Evidence from Granger-causality Tests

In this paper, we propose an alternative approach under which to examine the source of the increased wage gap between skilled and unskilled workers in US manufacturing. Rather than imposing the assumptions inherent in a given structural form, we posit a long-run equilibrium relationship between international trade, technology, and the wage premium using a vector error-correction model. We first test for the existence of a long-run relationship using cointegration tests. If a cointegrating relationship is found, we then conduct tests on the direction of the long-run relationship and of Granger causality. We apply our approach to each two-digit and four-digit SIC industry and find evidence in support of international trade being an important source of the wage gap. Our results suggest that it is premature to dismiss international trade as a possible suspect behind the rising wage premium. Copyright © 2006 The Authors; Journal compilation © 2007 Blackwell Publishing Ltd.