Globalization, Wage Volatility, and the Welfare of Workers*

Abstract

This paper analyzes the effects of trade liberalization on the level and volatility of factor returns, in a model with identical technologies across industries and industry-specific uncertainty. The results show an increase in the return to capital and, under certain conditions, a decline in the real wages and welfare of workers, along with an expansion of wage dispersion and volatility. Unlike the Solper–Samuelson mechanism, our results do not depend on the factor intensity of imports and exports and are borne out by all patterns of trade, including among industrialized countries, suggesting that the traditional analysis has missed some important linkages between trade and wages.