Multi-sector specific factors model with two mobile factors

- We build a multi-sector specific factors model with two mobile labor factors.
- We calibrate the model by estimating elasticity of substitution between factors.
- Elasticity of substitution is critical for factor returns and the skill premium.
- Stolper-Samuelson theorem may be seriously plagued by an aggregation problem.
- A single price change in an industry has modest effects on the skill premium.

This paper is an extension of the specific factors model to the study of relative wages by considering a multi-industry model with skilled and unskilled labor as the only mobile factors. We show that for changes in the price of a single industry, the impact on the skill premium is usually modest and sometimes the sign is the reverse of expectations. The elasticity of substitution between factors is critical for single-sector price changes. To generate a Stolper-Samuelson magnification effect, it is necessary to have a large number of price changes across industries intensive in either skilled or unskilled labor.