RESULTS OF PRODUCT-PRICE STUDIES: Synthesis of Existing Findings and Methodological Progress 3

Posted by Connie R. Aponte on June 6, 2014 in RESULTS OF PRODUCT-PRICE STUDIES |

The later studies improve upon the “consistency check” methodology in several ways. Most importantly, they have less distance between SS theory and their empirical analysis. The mandated-wage regressions of Leamer, BC, Krueger, and FH come closer than the consistency checks to testing the Correlation Version of the SS theorem that, as discussed in Section 2, is probably the version most applicable to the issue of rising wage inequality. And these regressions follow directly from the zero-profit conditions expressed in terms of changes in equation (2), rather than mixing changes with levels.
Product-price changes (or some other trade-related exogenous force such as outsourcing for FH) are the dependent variable, factor cost shares are the independent variable, and factor-price changes are the parameter estimates. These estimates have a clear interpretation in light of equation (2) as the “best guess” factor-prices changes mandated by changes in the dependent variable to maintain zero-profits in all producing sectors. In terms of the SS Correlation Version in equation (4), these mandated “best guesses” estimate the correlation between changes in the dependent variable and changes in the cost-share weighted factor prices. Comparing actual with mandated factor-price changes indicates how much of the actual factor-price changes can be accounted for by the dependent variable. The ability to do this accounting within the mandated-wage framework solves one of the major limitations of the consistency-check framework. (This is not to say that descriptive consistency checks are abandoned altogether–Leamer and BC complement their regressions with stylized facts, and Krueger also estimates LS-style regressions). And as Leamer and FH (1997) demonstrate, this mandated-wage framework can be used not just for product-price changes but for technology changes as well.

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