Foreign Competition and Wage Inequality*

Abstract

I argue that increased foreign competition can affect technical choice and skill differentials even when actual imports do not rise significantly. I present a model of General Oligopolistic Equilibrium ("GOLE") in which a reduction in import barriers (whether technological or policy-imposed) encourages more strategic investment by incumbent firms. The predictions accord with many of the stylised facts: higher skill premia; higher ratios of skilled to unskilled workers employed in all sectors and throughout the economy; little change in import volumes or prices; and rapid technological progress with rather little change in total factor productivity.

JEL Codes: F16, J31, F12

* Presidential Address to the International Economics and Finance Society, AEA/ASSA Meetings, New Orleans, 6 January 2001. Published in Review of International Economics, 10:4, November 2002, 680-693.

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