Trade in Intermediates and the Rise in Wage Inequality in the UK: A GNP Function Approach

This paper contributes to the debate on trade and wages by estimating a GNP function for the United Kingdom using data for the period 1975-1999. Consistent with standard trade theory the GNP function treats factor supplies and output prices as exogenous and factor prices and output supplies as endogenous. Moreover, the GNP function explicitly distinguishes between different sectors and is therefore in principle consistent with general equilibrium trade theory. The signs of the estimated elasticities were mostly in line with theoretical predictions. The main findings of this paper are the following. Firstly, the skill bias of technological change is found to be the predominant source of the increase in wage inequality. Secondly, while the paper provides mixed results for the role of all trade, the results provide some evidence in support of the outsourcing-hypothesis which asserts that international outsourcing constitutes an important contributing factor to the widening wage gap. Finally, the factor-price insensitivity theorem does not seem to hold for the UK.