Factor price equalization? The cointegration approach revisited

Absolute factor price equalization across countries is a key prediction of the Heckscher-Ohlin-Samuleson model of international trade, one of the more influential “workhorse” models in economics. Despite its theoretical might, the factor price equalization hypothesis has received surprisingly little empirical support. In an important exception to the rule, Burgman and Geppert (1993) argue that this might be due to the neglect of the non-stationarity of the time series under consideration. And indeed, applying a cointegration approach to (nominal) unit labor costs in six major industrialized countries (Canada, France, Germany, Japan, the United Kingdom, and the United States), they find evidence of long-run factor price co-movement. This finding can be interpreted as being in line with equalization of factor prices amongst these countries.