Question

How does a trade theory explain a fall in the relative wages of unskilled workers in the United States? Explain.

Answer 1

Ans ) International trade negatively affects relative wages and employment of unskilled workers in USA. Increased competition from imported goods, lowers the price of the products made by domestic unskilled workers relative to the prices of goods that are made by skilled workers. Now, as the price of goods decreases, demand for unskilled labour also decreases. This decrease in demand leads to decrease in relative wages of the unskilled workers and their employment too.

Further, U.S mainly imports unskilled labour-intensive goods from developing nations, like China, therefore, demand for unskilled labour in US has dramatically declined.

Heckscher ohlin theory predicts that international trade leads to factor price equalisation across the trading partners. According to it, international trade will lower the wages of unskilled workers in USA, while it will increase the wages of unskilled workers in labor abundant countries until wages in all countries converge.

And hence, both relative wages and employment of unskilled workers has declined in USA.

This has also created a huge wage gap between the wages of skilled and unskilled labour in USA.