The Choice of Structural Model in Trade–Wages Decompositions

Abstract

This paper uses a calibrated general equilibrium model to decompose observed wage changes from trade and technology shocks into portions attributable to each source. It highlights some difficulties with the numerical performance of widely used theoretical trade structures. For small economies, the Heckscher–Ohlin model reveals specialization problems unless the price changes accompanying trade shocks are small. It can also yield strikingly different decompositions of the same wage change. A differentiated‐goods model removes specialization problems and accommodates large price changes, but introduces demand‐side responses greatly reducing the effect of trade on wages, and performs implausibly with sector‐biased technical change.