Despite the methodological progress that has been made, research to date still has fundamental limitations regarding the key question of how much international trade has contributed to rising wage inequality. In this last section I highlight three important limitations: the need for a clearer understanding of how product-price changes are related to exogenous forces attributable to international trade; the need to explore how slowly the Heckscher-Ohlin clock ticks; and the need to complement product-price data with other data that might overcome potential limits of the product-price data.
Decomposing Product-Price Changes
Most importantly, more work needs to link exogenous forces attributable to international trade to actual product-price changes. Stated alternatively, the literature to date has made substantial progress understanding how to relate a given change in relative product prices to changes in relative factor prices. But it has made relatively less progress understanding whether these product-price changes have anything to do with international trade.
This criticism of product-price studies is not new. Indeed, in a comprehensive survey of rising inequality Freeman (1995, p. 29) made the very same point three years ago: “Perhaps the biggest problem with these studies is that they ignore potential determinants of changes in sectoral prices and potential reasons for the proportion of unskilled workers in a sector to be correlated with changes in prices, save for trade.” But what’s important is that three years later, despite some progress the criticism still applies.