Technology, trade, and increasing inequality: does the cause matter for the cure?

This paper addresses an issue that has received a great deal of attention in recent years, both from international trade economists and from labor economists: What has caused the relative wage of skilled labor compared to unskilled labor in the USA to increase through the 1980s and 1990s? Prime candidates for causing this change have been 'trade'--the increased competition of US workers with unskilled workers abroad--and 'technology'--new products and processes that may have increased the productivity of skilled workers or skill-intensive industries relative to their unskilled counterparts. The paper reviews what has happened to relative wages and the explanations that have been suggested. A brief look at the empirical evidence from this literature is suggestive, but hardly conclusive. But the paper then asks whether the answer to this question really matters. It turns out that the appropriate policies for dealing with this change in relative wages do not depend on whether the cause of the change has been trade or technology. The paper concludes with an argument about the first-best policy for dealing with the increased wage differential, but also with some skepticism that any policy at all is needed. Copyright 1998 by Oxford University Press.