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RESULTS OF PRODUCT-PRICE STUDIES: A Survey of Nine Product-Price Studies 16

Posted by Connie R. Aponte on May 29, 2014 in RESULTS OF PRODUCT-PRICE STUDIES |

Finally, Harrigan and Balaban (HB) (1997) analyze product-price changes using a methodology different from the mandated-wage regressions. Their goal is to model economy-wide wages as determined jointly by technology, endowments, and product prices–which can be influenced, among other things, by international trade. Thus like Leamer and Baldwin and Cain, HB consider wage determinants other than international trade. HB start with a national revenue function with the standard properties implied by perfect competition, profit maximization, and nonjointness of production. HB then assume that this revenue function can be written as a general translog function with parameter restrictions implied by the standard properties. From this functional form a set of equations can be derived which relate each factor’s share in total national income to technology, factor supplies, and product prices. With appropriate data these cost-share equations can be estimated, and the parameter estimates linking factor cost shares with technology, endowments, and product prices can be combined with observed changes in these regressors to decompose actual wage changes into components due to technology, endowments, and prices.
HB apply this model to U.S. data from 1963 through 1991 by decomposing the economy into four primary factors and four products. The primary factors are high-school dropouts, high-school graduates plus some college, college graduates, and physical capital. There are two tradable and two nontradable industries, one each intensive in more-skilled labor and the other intensive in less-skilled labor. Total industry factor intensities are determined using both direct and indirect factor employments from 1977 input-output tables. Thus like Baldwin and Cain, HB focus on the entire U.S. economy and not just tradables.

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