Globalisation vs Skill‐Biased Technological Change: Implications for Unemployment and Wage Inequality

Globalisation and skill‐biased technological change have emerged as alternative explanations for the increase in US wage inequality since 1980. We investigate the static and dynamic effects of these shocks on unemployment across skill classes using a model of search unemployment. Although we confirm that globalisation and skill‐biased technological change both lead to increases in wage inequality, we show that these shocks may have different effects on unemployment. We also show that labour market institutions play a role in determining the size of shocks, which formalises an argument in Krugman (1994) about the labour market experiences of the US and Europe since 1980.