This paper examines the relationship between labor market imperfections and trade policies. The available evidence suggests that pervasive industry wage differentials of up to 20 percent remain even after controlling for differences in observed measures of workers' skill and the effects of unions. Theoretical analysis indicates that given non-competitive wage differentials of this magnitude policies directed at encouraging employment in high-wage sectors could significantly enhance allocative efficiency. For the United States and other developed countries, such policies are more likely to involve export promotion than import substitution. Increased international trade flows (at least through 1984) have been associated with increased employment in high-wage U.S. manufacturing industries relative to low-wage U.S. manufacturing industries.
*Published: This paper was subsequently published as Can Interindustry Wage Differentials Justify Strategic Trade Policy?, Lawrence F. Katz, Lawrence H. Summers, in NBER book Trade Policies for International Competitiveness (1989)
NOTE: WP2739 is also the basis for R1261, "Industry Rents: Evidence and Implications." From Brookings Papers on Economic Activity: Microeconomics 1989, pp. 209-275, (1989).
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