Stolper-Samuelson Theorem

The Stolper-Samuelson theorem is one of the central results of Heckscher-Ohlin theory, itself one of the principal theories of international trade. It provides a definite answer to a central question in applied economics: What is the effect of changes in the prices of goods, caused for example by changes in tariffs, on the prices of factors of production? As first presented by Wolfgang Stolper and Paul A. Samuelson (1941), it dealt with a very special framework with many restrictive assumptions, most notably that the economy consists of only two broad sectors, and that production uses only two factors (often labeled capital and labor). However, subsequent theoretical work has shown that essential features of the theorem hold much more generally. It has also been applied to a range of empirical issues, including the effects of increased globalization on income distribution in developed countries, and the long-run political allegiances of classes and interest groups.

The Stolper-Samuelson theorem in its original setting can be explained intuitively as follows. Suppose that one sector produces exports and the other produces goods which compete directly with imports. Suppose in addition that the import-competing sector is relatively "labor-intensive," meaning that it uses a higher ratio of labor to capital than the export sector. Now ask what will be the effect of a tariff or some other change, which raises the relative price of the import-competing sector's output. Clearly this will encourage that sector to expand. Provided that the economy is at or close to full employment of both factors, this expansion must come at the expense of the export sector. The combined expansion of the relatively labor-intensive sector and contraction of the relatively capital-intensive sector raises the aggregate demand for labor relative to capital, and so puts upward pressure on the wage. Because the price of exports has not changed, a higher wage must imply an absolute fall in the return to capital. This in turn implies that the wage must rise by even more than the price of imports. Thus, when import-competing goods are relatively labor-intensive, wage earners gain and capital owners lose, irrespective of which bundle of goods they consume. Put simply, in this case, protection unambiguously raises real wages.

The starkness and elegance of the theorem in its simplest form prompted much study of its robustness to relaxing the key assumptions. Wilfred Ethier (1974) and Ronald W. Jones and José Scheinkman (1977) highlighted the central prediction of the theorem which survives such relaxations: With many goods and factors, a tariff change will always raise the real return of at least one factor and lower the real return of at least one other factor. This generalization of the Stolper-Samuelson theorem does not contradict the basic prediction of international trade theory that economies facing fixed world prices will gain overall from tariff reductions. However, it highlights the potential for distributional conflict over trade policy. Unless compensation for income losses is actually paid, there are always both winners and losers from any change in trade policy.

Another key assumption is that all factors are fully mobile between sectors. Relaxing this for one of the two factors in the simplest case yields the specific-factors model, which provides an illuminating contrast with the Heckscher-Ohlin model. In line with the general results of the last paragraph, protection continues to raise the real return of one factor, the one specific to the import-competing sector, and to lower the real return of another factor, that specific to the export sector. However, its effect on the real return of the mobile factor is now ambiguous. The specific-factors model can also be viewed as depicting a short-run equilibrium. Over time, the specific factors lose their distinctiveness and become intersector-ally mobile, so the Stolper-Samuelson predictions are restored. (See Neary 1978.)

Among many applications, the Stolper-Samuelson theory has been used to address the "trade and wages" debate. This asks to what extent globalization in general, and increased imports from low-wage countries in particular, are responsible for widening the differential between skilled and unskilled wages in developed countries. With the two factors reinterpreted as skilled and unskilled labor, the simple version of the model is consistent with a widening differential, and Edward E. Leamer (1998) presents some evidence in favor of a Stolper-Samuelson chain of causation, though most authors have preferred to explain the fall in demand for unskilled labor by skill-biased technological progress. However, technology and trade are interlinked. Robert Feenstra (1998) and Ronald W. Jones (2000) develop a theory consistent with the empirical evidence and has a strong Stolper-Samuelson flavor. Improved communications have allowed large firms to fragment their operations, moving more unskilled-labor-intensive stages of production to countries where unskilled wages are low, so lowering unskilled wages in developed countries while simultaneously raising skilled wages in developing countries.

Finally, the Stolper-Samuelson theorem has also been used to explain the political economy of responses to changes in countries' exposure to trade, most notably by Ronald Rogowski (1989). Using an extended model with three factors—labor, land, and capital—he deployed a wide range of historical evidence to show how differences in factor endowments could explain cross-country variations in the impact of trade on nations' internal political cleavages.

SEE ALSO Heckscher-Ohlin Theory;Theories of International Trade.

BIBLIOGRAPHY

Deardorff, Alan, and Stern, Robert M., eds. The Stolper-Samuelson Theorem: A Golden Jubilee. Ann Arbor: University of Michigan Press, 1994.

Ethier, Wilfred. "Some of the Theorems of International Trade with Many Goods and Factors." Journal of International Economics 4 (1974): 199–206.

Feenstra, Robert. "Integration of Trade and Disintegration of Production in the Global Economy." Journal of Economic Perspectives 12(4) (1998): 31–50.

Jones, Ronald W. Globalization and the Theory of Input Trade. Cambridge: MIT Press, 2000.

Jones, Ronald W., and Scheinkman, José. "The Relevance of the Two-Sector Production Model in Trade Theory." Journal of Political Economy 85 (1977): 909–935.

Leamer, Edward E. "In Search of Stolper-Samuelson Linkages between International Trade and Lower Wages." In Imports, Exports, and the American Worker, ed. Susan M. Collins. Washington, DC: Brookings Institution, 1998.

Neary, J. Peter. "Short-Run Capital Specificity and the Pure Theory of International Trade." Economic Journal 88 (1978): 488–510.

Rogowski, Ronald. Commerce and Coalitions: How Trade Affects Domestic Political Alignments. Princeton, NJ: Princeton University Press, 1989.

Stolper, Wolfgang, and Samuelson, Paul A. "Protection and Real Wages." Review of Economic Studies 9 (1941): 58–73.

J. Peter Neary