Trade and factor returns: Empirical evidence from U.S. economy

The purpose of this paper is to illustrate the usefulness of the specific factors model for calibrating the impact of various exogenous changes by simply estimating the elasticities of substitution for any number of sectors. Jones (1971) shows how with just a few parameters one can determine the impact of any price change in some sector on the wages of the mobile factor as well as all of the returns to the specific factors elsewhere in the economy. It is well-known that in the specific factors model, the increase in the price of any commodity will raise the wage of the mobile factor by a fraction of the percentage increase in the price, and that there will be a magnification effect on the specific factor used in that commodity and negative effects on all of the other specific factors in the economy. I estimate the elasticity of substitution by using CES production function and show how these estimates describe the general equilibrium of production with one mobile factor (labor) and nine industries of an open U.S. economy using data for 1979-2001. The results are consistent with the theory. I find that the value of the elasticity of substitution along with factor intensity between industries plays an important role in determining the impact of commodity prices on wage of mobile factor and rate of return to the specific capital.