International Trade, Technology, and the Wage Gap: Evidence from Granger-causality Tests* Sucharita Ghosh and Steven Yamarik Abstract In this paper, we propose an alternative approach under which to examine the source of the increased wage gap between skilled and unskilled workers in US manufacturing. Rather than imposing the assumptions inherent in a given structural form, we posit a long-run equilibrium relationship between international trade, technology, and the wage premium using a vector error-correction model.We first test for the existence of a long-run relationship using cointegration tests. If a cointegrating relationship is found, we then conduct tests on the direction of the long-run relationship and of Granger causality.We apply our approach to each two-digit and four-digit SIC industry and find evidence in support of international trade being an important source of the wage gap. Our results suggest that it is premature to dismiss international trade as a possible suspect behind the rising wage premium. 1. Introduction One of the most widely-discussed public policy issues in the US has been the rising wage premium or wage gap during the 1980s and 1990s. In 1979, a male college- educated worker earned 30% more on average than his male high-school-educated counterpart. By 1995, this wage premium had risen to about 70% (Katz and Autor, 1999). Similarly, in the manufacturing sector, the relative wage of nonproduction (taken as skilled) to production (taken as unskilled) workers declined from 1958 to 1979, but since then has risen by 10% per year (Slaughter, 1999). Many researchers have investigated the source of the increased wage premium. In the labor market, increases in the relative demand for skilled over unskilled labor or decreases in the relative supply of skilled labor could cause an increase in the wage gap. In addition, declining union membership or other changes in labor market insti- tutions could also lead to a rising wage premium. However, the list of possible suspects behind the rising wage premium has been essentially narrowed to two: increased com- petition from low-wage countries and skill-biased technological change from increased use of information technology. 1 Researchers have adopted one of two approaches to test for the cause of the increased wage premium. Based on the Stolper–Samuelson theorem, the trade approach of Lawrence and Slaughter (1993) examines the relationship between import and export prices. If international competition is the cause of the increased wage gap, then the prices for the least-skill-intensive goods should fall relative to other goods. The labor approach of Berman et al. (1994) decomposes changes in relative employ- ment and relative wages of skilled workers into those occurring within industries and Review of International Economics, 15(2), 321–346, 2007 DOI:10.1111/j.1467-9396.2006.00618.x © 2006 The Authors Journal compilation © 2007 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA *Ghosh: University of Akron, 446 CAS Building, Akron, OH 44325-1908, USA. Tel: 330-972-7549; Fax: 330-972-5356; E-mail: sghosh@uakron.edu. Yamarik: California State University at Long Beach, SS/BA Building, Long Beach, CA 90840, USA.Tel: 562-985-4634; Fax: 562-985-5804; E-mail: syamarik@csulb.edu. We wish to thank an anonymous referee, Donald Lien, Michael Ryan, and participants of the 2003 Midwest International Economics and Economic Theory Meetings at the University of Pittsburgh for their helpful suggestions and comments. All remaining errors are, of course, our own.