Trade and inequality in wages and unemployment

Increased globalization has shifted demand towards skilled labor at the expense of unskilled labor in developed countries. Increased skill mismatch calls for flexible wages and widened wage dispersion. Using a large macroeconometric model with heterogeneous labor, we show that the downward pressure on import prices has increased skill mismatch and-somewhat surprisingly-decreased wage differentials in Norway. The reason is that while the relatively unchanged macroeconomic consequences of this development is the primary focus in centralized wage setting among blue-collar workers, the reduced cost of living plays a more important role in more decentralized negotiations among white-collar workers.