There continues to be considerable concern that the expansion of trade with developing countries (hereafter South) is lowering the relative wage of unskilled labour in developed countries (hereafter North). The issue of income divergence in the North is highlighted by the experience of the U.S., where a marked decline in the relative wage was observed during the 1980's and the 1990's. The striking feature of this decline was that it occurred during the period when the U.S. was following trade liberalization policies and expanding its imports from the South. Thus a similar fear of a decline in the relative wage has been expressed in these northern countries.
The causal relationship between international trade and the relative wage dispersion is normally explained in terms of the (well-known) Heckcher-Ohlin-Samuelson theory (hereafter HOS) with two factors (skilled and unskilled labour). In this model, Stolper-Samuelson theorem can be used to showthat trade liberalization would lower the relative wage of unskilled labour in the skill rich North.
A number of studies, for example, Murphy and Welch (1991), Katz and Murphy (1992), Borjas, Freeman and Katz (1992), Batra (1993), Wood (1994, 1995), Sachs and Schatz (1994) and Leamer (1994, 1995, and 1996) provided empirical evidence in support of this HOS interpretation. They argued that the trade had been a contributing factor to the rising income differentials in the U.S.and other countries in the North.