Factor price equalization theory
The factor price equalization theory is a theory that explains the effects of trade and globalization on the price of goods. The theory is often applied to workers’ wages. It predicts that trade will make less scarce the less-skilled workers in advanced countries and skilled workers in developed countries, therefore reducing their wages. Conversely, it will make more scarce unskilled workers in developing countries and skilled workers in developing countries, therefore raising their wages. The eventual outcome predicted by the theory is that equally skilled workers across countries will have equal wages.
The factor price equalization theory has mixed results when applied to empirical cases. Although there have been rising wage gaps between skilled and unskilled workers in the United States, Freeman finds that, “Standard factor content analysis says that trade can account for 10-20% of the overall fall in demand for unskilled labor needed to explain rising wage differentials in the US.” However, unskilled workers in developing countries do appear to be seeing their wages rise in such cases as Asian sweatshops.
- Freeman, “Are Your Wages Set in Beijing.” International Political Economy: Perspectives on Global Power and Wealth. 4th ed. Boston: Bedford/St. Martin’s, 2000.