Stolper–Samuelson Time Series: Long‐Term US Wage Adjustment

• Published date: 01 February 2013
• Author: Henry Thompson
• Date: 01 February 2013
• DOI: http://doi.org/10.1111/rode.12021

Stolper–Samuelson Time Series: Long-Term US

Wage Adjustment

Henry Thompson*

Abstract

Factor prices adjust to product prices in the Stolper–Samuelson theorem of the factor proportions model.

The present paper estimates adjustment in the average US wage to changes in prices of manufactures and

services with yearly data from 1949 to 2006. Difference equation analysis is based directly on the compara-

tive static factor proportions model. Factors of production are fixed capital assets and the labor force.

Results have implications for theory and policy.

1. Introduction

The Stolper–Samuelson (SS, 1941) theorem concerns the effects of changing product

prices on factor prices along the contract curve in the general equilibrium model of

production with two factors and two products. The result is fundamental to neoclassi-

cal economics as relative product prices evolve with economic growth. The theoretical

literature finding exception to the SS theorem is vast as summarized by Thompson

(2003) and expanded by Beladi and Batra (2004). Davis and Mishra (2007) believe the

theorem is dead due to unrealistic assumptions. The scientific status of the theorem,

however, depends on the empirical evidence.

The empirical literature generally examines indirect evidence including trade

volumes, trade openness, input ratios, relative production wages and per capita

incomes as summarized by Deardorff (1984), Leamer (1994) and Baldwin (2008).

There is evidence of the predicted wage convergence across trading partners in Tovias

(1982), Gremmen (1985), Dollar and Wolff (1988), Mokhrari and Rassekh (1989),

O’Rouke and Williamson (1992) and Rassekh (1992) as reviewed by Rassekh and

Thompson (1998). Leamer and Levinshon (1995) and Leamer (1996) find evidence for

rising wages in labor scarce developed countries. Rassekh and Thompson (1997) find

support for the SS theorem in industrial countries controlling for model assumptions.

Copeland and Thompson (2008) uncover evidence that falling import prices from

1974 to 1997 raise the US wage. Thompson (2010) finds evidence that energy input

along with capital and labor affect the US wage.

The present paper estimates wage adjustments in the context of the SS theorem to

changes in prices of manufactures and services with annual US data from 1949 to

2006. The relative price of services doubles during this period of increased interna-

tional specialization and trade. Fixed capital assets and the labor force are exogenous

variables in theory and the empirical analysis. The point of departure from theory is

the reduced form wage equation from the comparative static factor proportions

model.

* Thompson: Economics,Comer Hall, Auburn University, AL 36849, USA. Tel:334-844-2910; Fax: 334-844-

5999. E-mail: thomph1@auburn.edu.Thanks for comments and suggestions go to Farhad Rassekh, Charles

Sawyer, Roy Ruffin,Ron Jones, Manoj Atolia, Santanu Chaterjee and Svetlana Demidova.

Review of Development Economics, 17(1), 148–155, 2013

DOI:10.1111/rode.12021

© 2013 Blackwell Publishing Ltd