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Does Foreign Innovation Affect Domestic Wage Inequality?
Michael Dueker and Alison Butler

Abstract

We use an open-economy product-cycle model of domestic high-tech/low-tech wages to motivate anempirical specification and test key model-implied restrictions. With data for 11 countries froman internationally comparable data set from the OECD, we conduct panel cointegration analysis thatsupports the hypothesis that foreign and domestic innovation rates affect domestic wage inequalityby equal and opposite magnitudes. The estimated elasticities imply that a 10% increase in thedomestic (foreign) innovation rate leads to a 3% increase (decrease) in the high-tech wage rate,relative to the low-tech wage. An atheoretic empirical regression that includes several of thesame variables, but not the same specification as the product-cycle model, fails to yieldsignificant results, in contrast to the specification derived from the product-cycle model.