International trade, technological change and wage inequality in the UK economy

This paper examines the joint impact of international trade and technological change on UK wages across different skill groups. International trade is measured as changes in product prices and technological change as total factor productivity (TFP) growth. We take account of a multi-sector and multi-factor of production economy and use mandated wage methodology in order to create a well-balanced approach in terms of theoretical and empirical cohesion. We use data from the EU KLEMS database and analyse the impact of both product price changes and TFP changes of 11 UK manufacturing sectors on factor rewards of high-, medium- and low-skilled workers. Results show that real wages of skill groups are significantly driven by the sector bias of price change and TFP growth of several sectors of production. Furthermore, we estimate the share of the three skill groups on added value for each year from 1970 to 2005. The shares indicate structural change in the UK economy. Results show a structural change owing to decreasing shares of low-skilled workers and increasing shares of medium-skilled and high-skilled workers over the years.