This paper addresses the ongoing debate on cross-country convergence from the perspective of labor markets. It constructs and analyzes a new data set on purchasing-power-parity (PPP) adjusted wages for skilled and unskilled labor in a large sample of countries from 1968-1998. Up till now, research on growth and convergence has concentrated almost exclusively on the behavior of aggregate variables such as GDP per capita or per worker; Baumol (1986), Abramovitz (1986), Barro and Sala-i-Martin (1995), Caselli, Esquivel and Lefort (1996), and others have established many important results on the long run evolution of aggregate incomes.
This paper, however, shares the basic contention of Williamson (1995) and O’Rourke and Williamson (1999) that factor incomes ought to be studied for the additional leverage that they give to our understanding of convergence processes, illustrated so well by studies on Heckscher-Ohlin-Samuelson (HOS) effects. There are at least three good reasons for studying factor incomes.
First, economic forces leave their mark on factor markets directly. Convergence or divergence between countries should therefore be more readily manifested and identifiable in factor price trends than in aggregate income statistics. This is especially true if the economic forces have an unbalanced or assymetric impact on returns to labor, skills, land, and capital. Romer (1994), Pritchett (1997), and others have found scant evidence of convergence in real GDP per capita on a global scale. Will the evidence from labor markets corroborate this result?
Second, real GDP per capita and per worker are coarse statistics. By averaging out all factor incomes (or equivalently, all sector value-added production) over the entire population or workforce, these aggregates tend to obscure wage movements that impact the welfare of individual wage earners. Around the mid-1970s, the United States began to experience a secular rise in earnings inequality, characterized by a bottoming out of unskilled wages (Katz and Murphy 1992; Freeman and Katz 1995). In the context of wages, the skilled-unskilled wage ratio increased dramatically. A cross-country study of this relative wage ratio can enhance our understanding of how convergence forces in a globalizing world have influenced these trends in wage inequality.
Third, movements in factor prices provide valuable clues for sorting out the sources of convergence. The different hypotheses offered to explain the evolution of country incomes often make distinct predictions on the returns to skilled and unskilled labor. If broad-based, non-sector-biased technological change were the main force driving growth, both skilled and unskilled wages would rise in tandem, and the skilled-unskilled wage ratio should remain fairly stable. In contrast, if open economy forces were at work, HOS thinking suggests that production and exports in rich, skilled labor-abundant countries should shift towards skill-intensive industries, thus raising the relative skilled wage; the exact opposite would be true for poor, unskilled labor abundant countries. The skilled-unskilled wage ratio would move in opposite directions in the two types of economies, generating a convergence in the relative wage structure across borders. An analysis of factor prices would allow us to take a first step towards testing these competing hypotheses.
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