Cecilia Garcia-Peñalosa: cecilia.garcia-penalosa[at]univ-amu.fr
This paper explores empirically the relationship between relative wages and relative endowments of skilled and unskilled workers in open economies across the world. It reconciles di erent views about the role of national labour markets in wage determination when countries trade. The observed sensitivity of relative wages to variation in endowments in open economies, across countries and over time, is hard to reconcile with the standard HOS model. By contrast, this sensitivity is intrinsic to a more general (so labeled GHO) model in which, as shown by our results, the wage-endowment elasticity depends on the height of barriers to trade and on the share of wages in goods prices. In GHO, openness to trade reduces - rather than eliminates - the sensitivity of wages to variation in endowments.