RESULTS OF PRODUCT-PRICE STUDIES: A Survey of Nine Product-Price Studies 4

Posted by Connie R. Aponte on May 5, 2014 in RESULTS OF PRODUCT-PRICE STUDIES |

Unlike the previous three papers, Feenstra and Hanson (FH) (1995) analyze the data from a Ricardian perspective rather than a Heckscher-Ohlin perspective. In their framework countries make completely different sets of products, unlike the Heckscher-Ohlin framework where all countries are (usually) assumed to be in the same cone of diversification. Importantly, FH are the first researchers to move away from the assumption that U.S. prices merely reflect international prices for the same products. They highlight the fact that during the 1980s (defined as 1980 through 1989) in the United States, Germany, and Japan, domestic prices rose by more than import prices did (pp. 17-18 and Table 1). This fact is consistent with their model of international outsourcing which raises wage inequality both in the United States and abroad (Proposition 3, p. 16). As marginal production activities relocate from the United States to abroad the relative demand for skills rises in both countries. A corollary of this shift is that U.S. prices rise by more than foreign prices. Thus if one interprets U.S. import prices as representative of the basket of “foreign” production, the fact about domestic vs. import prices is consistent with outsourcing raising U.S. (and foreign) wage inequality. payday loan debt assistance

Leamer (1996) uses a Heckscher-Ohlin perspective to analyze the wage implications of product-price shifts during the 1960s (1961 to 1971), 1970s (1971 to 1981), and 1980s (1981 to 1991). The data analysis has a descriptive component where “the empirical facts are presented with only a ‘light’ touch of the HO framework” (p. 15) followed by a “formal data analysis … which is based explicitly on the one-cone HO model” (p. 15).

Leamer’s descriptive analysis tracks domestic product prices for two-digit industries relative to the overall producer-price index (PPI) (Figures 10 and 14). The key sectors are textiles and apparel, two very labor-intensive industries. Leamer reports that the three decades behaved very differently. During the 1960s the prices of textiles and apparel fell relative to the overall PPI by a relatively modest 8% and 4%, respectively. During the 1970s their relative prices plunged by 30%. Finally, during the 1980s their relative prices were quite stable. The key message from these descriptive facts are that the 1970s, not the 1960s or 1980s, appear to be the decade where U.S. relative prices of less-skilled-labor-intensive products fell markedly.

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