Productivity Measurement and the Impact of Trade and Technology on Wages: Estimates for the U.S., 1972-1990

We develop an empirical framework to assess the importance of trade and technical change on the wages of production and nonproduction workers. Trade is measured by the foreign outsourcing of intermediate inputs, while technical change is measured by the shift towards high-technology capital such as computers. In our benchmark specification, we find that both foreign outsourcing and expenditures on high-technology equipment can explain a substantial amount of the increase in the wages of nonproduction (high-skilled) relative to production (low-skilled) workers that occurred during the 1980s. Surprisingly, it is expenditures on high-technology capital other than computers that are most important. These results are very sensitive, however, to our benchmark assumption that industry prices are independent of productivity. When we allow for the endogeneity of industry prices, then expenditures on computers becomes the most important cause of the increased wage inequality, and have a 50% greater impact than does foreign outsourcing.