North-South Trade, Employment and Inequality: Changing Fortunes in a Skill-Driven World

Abstract

Expansion of trade in manufactures between developed and developing countries has had a far greater effect on labour markets than earlier research suggested. In developing countries (the South), unskilled workers have benefited most from this trade, but in developed countries (the North) the gains have been concentrated on those with skills, while unskilled workers have suffered falling wages and rising unemployment, which has worsened income distribution and aggravated other social problems. The failure of Northern governments to recognize what is happening has fuelled the rise of protection—the worst possible response, which slows development in both regions. The best solution for the North in the longer term is more investment in education, but in the near term, other measures are needed to boost the demand for, and incomes of, unskilled workers.