Wage Differential, Trade, Productivity Growth and Education

There is a large literature on the link between wage differential, international trade and productivity growth.
The theoretical and empirical research is mainly based on the Heckscher-Ohlin-Samuelson framework and
on the cases of a large country. More comprehensive theoretical models are needed to guide further
empirical research. This paper contributes to the debate by providing a dynamic intertemporal general
equilibrium (DIGE) model incorporating endogenous skill formation. The result tends to support the
argument that trade has a responsibility for wage differential. A cut in government education investment
tends to raise wage differential. Productivity growth at best causes wage differential in the short run. From
a theoretical perspective it is unclear whether productivity growth raises wage differential in the long run
once the accumulation of skills is endogenized.