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Technical Progress and Real Wages Once again
Author(s) -
Batra Ravi,
Beladi Hamid,
Oladi Reza
Publication year - 2013
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12051
Subject(s) - economics , open economy , outcome (game theory) , productivity , context (archaeology) , wage , earnings , real wages , general equilibrium theory , labour economics , macroeconomics , microeconomics , exchange rate , paleontology , accounting , biology
We construct a general equilibrium model of trade and show that an economy can experience technological progress and declining real wages provided that it is open to trade and import demand is sufficiently inelastic in both countries. This is a puzzling outcome so far as marginal productivity paradigm is concerned. In this context we demonstrate that new technology works differently in a closed vs an open economy. In an open economy, technical improvements may generate a fall in labor real earnings, but not in a closed economy. In addition, technical progress in manufacturing must increase manufacturing–service wage gap according to marginal productivity doctrine. We show that the opposite outcome can occur theoretically in an open economy—yet another seemingly puzzling labor market outcome.