Global Supply Chains and Wage Inequality

A salient feature of globalization in recent decades is the emergence of “global supply chains” in which different countries specialize in different stages of a sequential production process. In Arnaud Costinot, Jonathan Vogel and Su Wang (2011), CVW hereafter, we have developed a simple theory of trade with sequential production to shed light on how global supply chains affect the interdependence of nations. The goal of this paper is to develop a multifactor extension of CVW to explore how the emergence of global supply chains affects wage inequality within countries. We start from the same basic environment as in Arnaud Costinot and Jonathan Vogel (2010), CV hereafter. As in CV, we consider a world economy with two countries, North and South, each populated by a continuum of workers with different skills. Both countries have access to the same technology for producing a unique final good, but North is skill abundant relative to South. Crucially, as in CVW, production of the final good requires a continuum of stages to be performed sequentially. At each stage, producing new intermediate goods requires workers and intermediate goods produced in the previous stage. The more skilled are workers at a given stage, the higher is the output of the intermediate good at the next stage. Like in our earlier work, our analysis is simplified by two observations. First, factor prices are always equalized in a free trade equilibrium. Thus the effect of trade integration on wage inequality is isomorphic to the effect of a change in the skill distribution in a closed economy. Second, the assignment of workers to stages of production exhibits positive assortative matching. Since workers operating in later stages of the production process can leverage their pro-