the skill and higher educational content of uk net exports

OXFORD BULLETINof

ECONOMICS and STATISTICS

OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 55,2(1993)0305-9049 $3.00

THE SKILL AND HIGHER EDUCATIONALCONIENT OF UK NET EXPORTS

Allan Webster

I. INTRODUCTION

The UK is clearly one of the developed world's more open economies and,with the coming of increased European integration, can only become yetmore dependent upon international trade in the future. To a large extent,therefore, the goods it currently produces and those it will produce in thefuture depend largely on what it can produce relatively efficiently in world or,at least, European terms. The most obvious concept to assess these relativestrengths and weaknesses is that of comparative advantage.

Modern concepts of comparative advantage extend beyond the traditionalfocus of the Heckscher-Ohlin model on endowments of physical capital andlabour alone as the sources of comparative advantage. In particular, labourskills and education - human capital' - are widely thought to be importantdeterminants of countries' specialization in the process of international trade.So, for example, comparative advantage principles suggest that an economyabundantly endowed in human capital will tend to export human capitalintensive goods and services and to import ones intensive in other factors ofproduction.

To date, the influence of labour skills and education on the UK's inter-national trade is not extensively documented. Moreover, studies of othercountries tend to treat human capital as a relatively homogeneous factor.Since there are many different types of skill and education the reality is quitedifferent. This creates the possibility that countries will specialize not just

141

Volume 55 May1993 No.2

142 BULIFTIN

according to their overall endowment of human capital but also according todifferent types of human capital. For example, we might expect a countryabundant in skilled and educated engineers to possess some advantage inengineering.

Documenting the link between the UK's human capital and its inter-national trade has implications beyond the study of comparative advantage.Firstly, the idea that an abundance of skills of certain types generates exportindustries which are competitive relative to foreign competition and a scarcityof other types of skill, uncompetitive import competing sectors is not very farremoved from concepts of skill shortages and their consequences. In thissense, then, assessing the extent to which the UK specializes in industriesintensive in particular types of skills is a way of revealing where the UK is inrelatively scarce or abundant supply of a particular skill.

Secondly, education is clearly an important element of the broader notionof skills or human capital. Since education is largely provided by the state,current endowments of skilled or educated labour are clearly heavilyinfluenced by past educational policy. Measuring the UK's trade performancein terms of its specialization according to human capital in general and interms of specific skills is, therefore, a basis for evaluating the performance ofpast educational policy in terms of its effects on the international tradingposition of the economy.

To assess these issues this paper analyses the determinants of UK netexports in 1984 with particular emphasis on the role of human capital. Theanalysis is based upon the factor content version of the Heckscher-Ohlinmodel of international trade. It predominantly uses calculations of the typefirst employed by Leontief (1953) but developed subsequently by numerousauthors. lt finds the UK in 1984 to be revealed to have been relatively scarcein manual skills compared to its trading partners. Evidence is provided tosuggest a weaker form of scarcity in many professional skills.

II. METHODOLOGY AND DATA

A large number of studies employing either Leontief-type techniques orregression analysis or (more rarely) both have been conducted for the sourcesof US comparative advantage - see, for example, Baldwin (1971), Stern andMaskus (1981), Sveikauskas (1983), Maskus (1985) and Hartigan and Tower(1986). Studies of other economies have tended to be much less numerous.Urata (1983) and Vestal (1989) have conducted studies for Japan andGremmen and Vollebergh (1986) for the Netherlands.

For the UK, Crafts and Thomas (1986) provide a combined factor contentand regression analysis of the soruces of UK comparative advantage for1910-35. Katrak (1973) provides a regression analysis of UK exports and(1982) a factor content study of UK trade in 1962, 1972 and 1978. Regres-sion studies of the relationship between UK trade and innovation have been

EDUCATIONAL CONTENT OF UK NET EXPORTS 143

performed by Greenhalgh (1990) and Hughes (1986) (who also consideredhuman capital). However, regression coefficients have been shown byLearner and Bowen (1981), Aw (1983) and Staiger (1988) to be difficult tointerpret in the context of the factor proportions theory. They, therefore,need to be complemented by further work. For the UK only Katrak (1982)and Crafts and Thomas (1986) provide such complementary evidence. Oneobjective of this paper is to provide a more recent and more detailed study ofthe factor content of UK trade.

Secondly, many of the studies discussed above (including those of the UK)have placed particular emphasis on human capital or, equivalently, labourskills. Some, starting with Keesing (1965), have focused exclusively on theskill content of trade. As has been widely recognized in this empirical litera-ture, labour skills are evidently not a homogeneous factor of production.However, these studies at best consist of a decomposition of labour require-ments into a few aggregate classes such as professional, technical andmanagerial' (Keesing, 1965). Whilst this approach is perfectly justifiablewhen one is considering the broad sources of comparative advantage, it doesignore the possibility that international differences in endowments in specifictypes of skill may also be a cause of international specialization. This isparticularly likely where, as in the case of the UK, much trade is conductedwith economies with broadly similar relative endowments of human capital ingeneral.

A disaggregated approach offers two possibilities. First, it enables thevalidity of aggregation to be tested. Secondly, whether aggregate categoriesare a valid generalization or not, it enables a secondary, intra-categorypattern of specialization to be identified. Section IV of this paper performs adisaggregated analysis of the skill content of UK net exports and Section Vproduces evidence that, at least for the data set used, aggregation is valid inthe context of a broad approach.

Moreover, the issue of skill shortages' is one of considerable interest topolicymakers in the UK. Skill shortages are commonly seen as a disequi-librium phenomenon - firms being unable to fill vacancies for skilled labour.There is also an equilibrium version of this argument - scarce skillscommand a high wage causing goods intensive in their use to be relativelymore expensive than ones making less intensive use of the particular skill(thereby affecting trade performance). This, second, view is close to aHeckscher-Ohlin view of international trade. Learner (1980) shows thatfactor content studies provide measures of an individual country's excessendowment of each factor (that is, in relation to the rest of the world). Theestimates presented in this paper are, therefore, also estimates of the UK'sscarcity or abundance of the skills concerned. The results are interpreted inthis light in the concluding section.

Specifically, factor content analysis is static in that it takes factor endow-ments as given. The endowments of particular skills are not merely the resultsof chance but reflect both past investment decisions of individuals in their

144 BULLETIN

own skills and educational policy. A major implication, therefore, of themeasures of revealed skill abundance or scarcity provided in this paper is thatthey are the consequence of past educational/training policy.

Concerning current or future policy, it is not the intention of this paper tosuggest that any particular skill should necessarily be the target of increasedinvestment merely because it is revealed to be a source of disadvantage.Indeed, a comparative advantage in one factor must necessarily imply that atleast one other factor must be a source of disadvantage. This paper, therefore,cannot address the issue of whether more investment in human capital wouldbe desirable or not. Given that other authors referenced earlier haveaddressed this issue, it can, however, provide an evaluation of (a) the role ofspecific skills in international specialization and (b) which skills are relativelyscarce. The point of this paper is, therefore, to provide relevant empiricalevidence on the existence or otherwise of skill scarcities rather than to derivenormative conclusions.

Lastly, in both factor content and regression studies three types of measureof human capital have been employed - occupational (the most common),educational or one based on discounted industry wage differentials. Occupa-tional skills and (formally) educated labour are clearly not identical. Somecomparison of the skill and educated labour requirements of internationaltrade within the same data set is, therefore, a potentially fruitful way of under-standing how they jointly affect trade performance and of assessing theequivalence or not of each type of measure. This, in general, has not beenperformed in previous studies. Section VI of this paper conducts a compari-son between the (occupational) skill content and the educated labour contentof UK net exports.

Turning to the methodology of factor content studies of internationaltrade, these are a long established technique deriving mainly from the work ofLeontief (1953) and Vanek (1968). Readers desiring a general description ofthe technique are referred to Deardorif (1984). It should, however, be notedthat there is considerable evidence that international trade is influenced by, inparticular, imperfectly competitive market structures as well as by compara-tive advantage. Since trade of this type is intra-industry in nature, factorcontent analysis properly focuses on net exports which represent inter ratherthan intra industry specialization.

The essence of the approach - following Leamer and Bowen (1981) - isthat, assuming all countries allocate expenditure identically, the followingrelationship holds:

AT,=EEw, (2.1)

where A is a matrix whose elements comprise the quantities of each factorused to produce a unit of each good, Ti the vector of country i's net exports,w country i's share in world factor endowments under balanced trade and E.and E the vector of factor endowments for country j and the rest of theworld. Since the matrix A is a standard Leontief inverse and the vector of net


commodity trade is known this technique can be used to infer factorabundance.

Note that this technique calculates the relationship between commoditytrade and factor intensities and, in so doing, implies a measure of factorabundance. lt is not, therefore, as Deardorif (1984) notes, a test of theHeckscher-Ohlin theorem. Moreover, the original technique also containedassumptions of free and balanced trade, factor price equalization and inter-nationally invariant homogeneous technology (giving a single matrix A).However, violation of most of these assumptions has since been shown not toinvalidate the model.

Learner (1980) shows that, by modifying the analysis to consider the factorcontent of net exports relative to the factor content of domestic consumption,the model remains valid under unbalanced trade. Brecher and Choudri(1982) similarly show that the factor content approach holds when factorprices are not equalized, whilst Clifton and Marxsen (1984) demonstrate thatthe model remains valid in the simultaneous absence of factor price equaliza-tion and the presence of tariff protection. Helpman (1984) shows that,provided factor prices are not equalized internationally (and they almost cer-tainly are not), it is not necessary to assume identical homothetic preferencesfor the factor content model to hold.

Factor content studies are, therefore, applicable under fairly generalcircumstances, the only critical assumption being internationally invarianthomogeneous techniques of production. Even a violation of this can bepartially accommodated by using the Leontief inverse from more than onecountry and comparing factor content calculations of bilateral trade on bothcases. However, such an approach has a drawback as some aggregation ofcertain factors (skills and different types of physical capital mainly) is virtuallyessential for any empirical application. Gift and Marxsen (1984) show thatsuch aggregation is valid under any arbitrary linear weighted averagingprovided that the weights do not vary between countries. Using data fromtwo countries almost certainly violates this condition.

The ideal would, therefore, be a two (or multi) country study with data ondisaggregated factors of production. In practice this would make datarequirements that are impossible to satisfy. In any case, as Brecher andChoudri (1988) point out, any unwarranted disaggregation would invalidatethe theoretical basis of the model.

Given these limitations with multi-country studies this paper adopts theapproach of a single country (UK) study. This is principally because theintended emphasis on disaggregated labour skills creates problems of dataconsistency between countries.

Factor requirements for UK net exports and consumption were calculated,initially, using: Central Statistical Office, 1988, Input- Output Tables for theUnited Kingdom 1984, London: HMSO. It should be noted that thiscomprises data for some 101 economic activities including services andutilities.

146 BULLETIN

Labour requirements were, then, decomposed using data on the occupa-tional composition of the workforce, by industry, taken from: Office ofPopulation Censuses and Surveys 1984, Census 1981: Economic Activity,London: HMSO. This provided details on the employment, by industry, ofsome 162 occupational categories of labour. Requirements for each occupa-tional category were derived by head count. This procedure has been usedpreviously by several authors such as Learner (1980) and Baldwin (1971) andhas been shown to be legitimate by Gift and Marxsen (1984). In this case,some aggregation of labour requirements by industry was necessary forconsistency with the census data. Two assumptions are also contained in theanalysis - (a) that the skill requirements of each activity were unchangedbetween 1981 and 1984 and, since the census data refers to Great Britainand not the UK, (b) that the techniques of production in Northern Irelandmake identical labour requirements to those in the rest of the UK.

There is also a continuing controversy as to whether factor content studiesshould be based on direct factor requirements or gross (direct plus indirect)requirements. Work by Hamilton and Svensson (1983) and Deardorif (1982)implies that the appropriate form of measurement is a gross basis whereStaiger (1986) argues in favour of a direct basis. As it is beyond the scope ofthis paper to effect a reconciliation between these contradictory views, apolicy of reporting results on each basis has been maintained throughout.These rarely make any difference to the interpretation of the results.

III. THE FACTOR CONTENT OF UK TRADE: A BROAD APPROACH

This section presents calculations of the factor content of UK net exports in1984 using broad aggregates of factors. This is intended to serve a dualpurpose. Firstly, the later detailed examination of the role of labour skillsneeds to be put in a general context. It would, for example, be potentiallymisleading to conclude that labour skills were a principal determinant of UKtrade without considering them in comparison to the UK's net exports ofcapital. Secondly, an aggregate approach provides a basis for comparisonwith other recent studies conducted on a similar basis. However, theproblems of measuring physical capital are sufficiently well known that theresults must be treated with some caution.

Table 1 reports the factor requirements of UK net exports for fivecategories of labour, four categories of natural resources and two categoriesof physical capital. As with many earlier studies such as Katrak (1982)physical capital was measured by current expenditures. Natural resourceswere also measured in terms of flow expenditures. Physical capital, followingSveikauskas (1983), was classified into (i) plant and (ii) equipment. Naturalresources, in a manner similar to Harkness (1983), were classified into (i)coal, (ii) oil and natural gas, (iii) metal ores and (iv) other minerals. Thecategorization of labour closely followed that of Keesing (1965). Labour


aggregates were computed from the detailed data described in Section IIabove and categorized according to: Office of Population Census and Surveys1984, Classification of Occupations, London: HMSO.

Learner (1980) shows that a country is revealed to be well endowed in onefactor relative (K) to another (L ) if and only if one of the following conditionsapplies:

K,.K,,,>0, L,L,<0 (3.1)

K,. - K,,, >0, L - L,,, >0, (K - K,,,)/(L - L,,,)> K,./L (3.2)

K,, - K,,, <0, L,, - L,,, <0, (K, - K,)/(L - L,,,) < K(./L( (3.3)

where the K1 and L. are the amounts of K and L embodied in exports (x),imports (m) and consumption (c). The meaning of this is that, given thepossibility of unbalanced trade, factor abundance is 'revealed' if the country,on balance, uses proportionately more of a particular factor's services inproduction than in consumption.

Note that all three conditions given by expressions (3.1) to (3.3) are equiva-lent to satisfying the single condition:

(K,, - K,,,)/K,> (L - L,,,)/L( (3.4)

Table 1, therefore, reports net export requirements relative to those forconsumption. To facilitate comparisons of the type given by expression (3.4)rankings according to the ratio of net export to consumption requirementsare also reported. Since comparative advantage is essentially an ordinalrather than cardinal concept interpretation of the results focuses largely onthese rankings. Absolute factor contents are included solely to provide anindication of the magnitudes involved.

The results of Table 1 suggest, unsurprisingly, that the UK is a substantialnet importer of natural resource intensive outputs. It is revealed to berelatively (to unskilled labour) scarce in all natural resource categories exceptcoal. That the UK is scarce in many natural resources is widely known. Thatit affects the pattern of comparative advantage, therefore, provides someconfirmation of the Heckcher-Ohlin theory. Scarcity of oil relative tounskilled labour is, however, less in accord with what one might expect. Thisarises, presumably, because crude oil is extensively traded at 'world' pricesand cannot, therefore, be a source of advantage to British industries intensivein its use.

Physical capital services and, in particular, those of machinery are thestrongest sources of UK net exports (considering 'labour' as a singlecomposite factor). Relative to all other factors, with the possible exception ofclerical, sales and service labour, the UK's endowment of physical capital isrevealed to be abundant. Concerning the labour aggregates, the UK isrevealed to be relatively (to unskilled labour) well endowed with profes-sional and managerial labour and with clerical, sales and service labour.Capital and non-manual labour are, therefore, the main sources of compara-

148 BULLETIN

TABLE IFactor Content of UK Net Exports, by Aggregate Skill Categories

tive advantage for the UK whilst manual labour (skilled or not) and naturalresources are, in general, sources of disadvantage.

There are several aggregate skill categories which are shown to berelatively scarce. Firstly, skilled and semi-skilled manual labour are revealedto be relatively scarce in relation to unskilled labour. This confirms the thrustof detailed studies by, for example, Prais (1987) that the level of manual skillsin the UK labour force is a source of disadvantage. Secondly, professionaland managerial labour is revealed to be scarce in the UK relative to clerical,sales and service labour. That UK comparative advantage relies more on thelatter category than the former must, by implication, suggest that at thehighest levels of education a case for relative scarcity can also be made. Thisquestion is examined in more detail in Section VI. Some comfort, however,could be drawn from the evidence of Hart and Shipman (1991) that Britishfirms are relatively efficient at using the limited labour skills available.

Lastly, that almost all skill categories are revealed to be scarce in relationto physical capital lends support to the general assertion that the UK'scontinued reliance on metal bashing' is associated with a relative lack ofcompetitiveness in newer, more skill intensive economic activities. Such an

Requirements:Net exports(1 million)

Net exports/Consumption:

Values Ranking

Direct Gross Direct Gross Direct Gross

Labour:Professional and

management372.2 275.8 0.0129 0.0068 4 4

Clerical, sales,service

847.6 783.0 0.024 1 0.0 157 2 1

Skilled manual - 1178.1 - 1466.1 - 0.0320 - 0.0287 7 8Semi-skilledmanual -803.7 -1081.4 -0.0561 -0.0512 9 10Unskilled manual -157.2 -215.7 -0.0139 -0.0141 6 6

Natureal resources:Coal -7.3 -37.0 -0.0036 -0.0112 5 5Oilandnaturalgas -449.6 -575.6 -0.0362 -0.0283 8 7Metal ores - 77.8 - 100.8 - 0.0998 - 0.0722 11 11Other minerals -14.5 -16.0 -0.0622 -0.0416 10 9

Capital:Plant 41.1 33.4 0.0276 0.0150 1 2Machinery 192.9 119.1 0.0224 0.0116 3 3


association does not in itself imply a direction of causality. The evidence hereis, at least, suggestive that it is a relative shortage of skills (including profes-sional ones) that drives the economy to specialize more in physical capitalintensive activities than in human capital intensive ones. Again, this findingtends to support the conclusions of detailed inter-country skill comparisonssuch as that of Steedman (1987).

IV. A DISAGGREGATED ANALYSIS OF THE SKILL CONTENT OF UK NETEXPORTS

The evidence produced in Section III above is sufficient to merit the closerexamination of the skill content of UK trade which this section provides. Thisexamination has two principal objectives - to evaluate as far as possiblewhich specific skills or skill groupings which are revealed to be scarce and toassess the extent to which the broad picture provided above ignoresimportant within category variations in skill endowments.

Table 2 presents estimates of the skill requirements of UK net exports in1984. These requirements were calculated for a total of 35 different occupa-tional categories. To some extent the degree of aggregation was determinedby data availability. For example, British census data reports economists,statisticians and computer professionals as a single category. However, afurther degree of aggregation from the 162 occupational categories availablewas quite intentional.

The reason for this is the finding of Brecher and Choudhri (1988) thatunwarranted disaggregation of factors violates the theoretical justification ofthe factor content model. It is, therefore, important that any particular skillcategory is genuinely distinct from another. By the same token, as Gift andMarxsen (1984) comment excessive aggregation risks ignoring importantintra-category variations. Care was, therefore, taken in selecting specificoccupational categories to choose only those available which representedskills which (a) are likely to involve some time and/or cost for the individualto acquire (thereby ensuring individuals are not freely transferrable betweenskill categories) and (b) have potential uses in the production of a variety ofgoods and services. In cases where such conditions were dubious or clearlyunsatisfied the occupation was assigned the relevant residual aggregate.

Table 2 reports UK net export requirements of each skill category inabsolute terms and relative to consumption. Rankings according to the ratioof net export to consumption requirements are again provided to facilitateinterpretation.

Relative to unskilled labour the UK is revealed to be abundant in almost allcategories of professional labour. The notable exceptions to this areengineering occupations (other than civil/mining engineers and mechanicalengineers) in which the UK is revealed to be more scarce than unskilledlabour. Thus, for these engineering professions there is strong evidence that

150 BULLETIN

TABLE 2Factor Content of UK Net Exports, by Aggregate Skill Categories

Requirements:Net exports(.0 million)

Net exports/Consumption:

Values Ranking

Direct Gross Direct Gross Direct Gross

Lawyers 35.3 40.7 0.0591 0.0432 3 3Accountants etc. 85.3 93.3 0.0415 0.0297 4 4Personnel,industrial -2.6

relations-5.6 -0.0058 -0.0084 19 20

Economists, statisticians, -5.6computer

-6.4 - 0.0071 - 0.0055 20 18

Marketing 4.8 -6.0 0.0027 -0.0024 15 16Doctors and dentists 0.4 0.3 0.0208 0.0128 8 8Pharmacists etc. 10.3 9.2 0.0877 0.0623 1 1

Artists, designers etc. -2.4 -2.7 - 0.0054 - 0.0043 18 17Scientists 13.0 10.2 0.0250 0.0135 7 7Civilandminingengineers 9.5 10.2 0.0262 0.0204 6 5

Mechanical engineers 1.6 -0.2 0.0021 - 0.0002 16 15Electrical and electronic -9.9

engineers-13.6 -0.0183 -0.0176 25 25

Other engineers -16.6 -24.1 -0.0185 -0.0187 26 26Draughtsmen 11.5 11.5 0.0146 -0.0101 10 10Technicians -5.8 -9.2 -0.0095 -0.0104 21 21Other technology 6.7

professionals3.8 0.0088 0.0034 14 14

Otherprofessional 40.2 52.8 0.0095 0.0085 13 12ALL PROFESSIONAL 175.3 164.1 0.0111 0.0087

OCCUPATIONSManagers 196.9 111.7 0.0151 0.0064 9 13Clericalandrelated 332.0 332.8 0.0143 0.0095 11 11Sales 442.1 388.4 0.0655 0.0447 2 2Serice occupations 73.5 61.8 0.0141 0.0101 12 9Printers 54.0 -66.0 -0.0446 -0.0336 30 30Tailors,dressmakersetc. 07.0 -321.0 -0.2366 -0.2015 35 35Tool makers and fitters -9.9 -13.3 -0.0202 -0.0189 27 27Instrumentmakersand -0.4

repairers-2.7 -0.0014 -0.0080 17 19

Production fitters, 94.4electricians, etc.

-132.9 -0.0173 -0.0174 24 24

Mechanics (mcl. computer 36.0 26.0 0.0301 0.0164 5 6Electronicmaintenance -2.6

fitters-2.8 -0.1014 -0.0825 33 33

Goldsmiths, engravers etc. -10.3 -10.6 -0.1252 -0.0887 34 34Welders -14.5 -19.5 -0.0170 -0.0161 23 23Busandtruckdrivers -115.5 -167.8 -0.0271 -0.0265 29 29Mechanical plant operators -50.7 -58.8 - 0.048 2 - 0.039 1 31 31Otherskilledand -554.9

supervisory-696.9 -0.0268 -0.0249 28 28

ALLSKILLEDMANUAL -1178.1 -1466.1 -0.0320 -0.0287Semi-skilled manual -803.7 -1081.4 -0.0561 -0.0512 32 32Unskilled manual -157.2 -215.7 -0.0139 -0.0141 22 22


these skills are more scarce in the UK (in relation to other skills and factors)than in its trading partners.

Comparing the requirements of UK net exports (per unit of consumption)between professional and clerical occupations suggests that this apparentrelative abundance of professional skills is not so marked. Relative to clericaloccupations only accountants, lawyers, health professionals, scientists, civil!mining engineers and draughtsmen are revealed to be abundant in the UK.With these important exceptions the disaggregated analysis confirms profes-sional labour not to be as strong a source of advantage as clerical labour.Within the field of non-manual occupations the UK, therefore, is revealed asbeing relatively scarce in professional skills.

Other non-manual skills (management, sales and service occupations) aresimilarly revealed to be abundant in relation to unskilled labour. Sales skillsare a stronger source of advantage than clerical skills whilst the positions ofmanagement and service occupations in relation to clerical skills areambiguous.

The UK, therefore, tends to have a comparative advantage in industrieswhich are intensive in the use of non-manual labour. However, there isconsiderable variation within the non-manual category. Particular strengthsare industries making intensive use of managers, clerical, sales and serviceworkers. Industries which are relatively intensive in some types of profes-sional labour - principally traditional professions and scientists - also tendto be net exporters but the UK is a net importer of the embodied services of anumber of professions such as designers, electrical and electronic engineers,technicians and economists, statisticians etc.

The dramatic areas of revealed skill scarcity are, however, those involvingmanual skills. Nearly all skilled manual occupations are revealed to be scarcein relation to unskilled labour, as is the semi-skilled category. The onlyexceptions to this are (j) instrument makers and (ii) mechanics. Of these onlymechanics remain a source of advantage in relation to clerical labour. TheUK is, therefore, revealed to be poorly endowed in almost all types of manuallabour in comparison to its trading partners. As a consequence manuallabour intensive and, in particular, skilled and semi-skilled labour intensiveactivities have a comparative disadvantage in the UK. This tendency isparticularly strong for what might be described as traditional' skills - print-ing, tailoring, fitters and the like.

To summarize, the UK is revealed to be relatively (to unskilled labour)abundantly endowed in relation to its trading partners in non-manual skills.However, this is much more true o1 what might be described as less complexskills (clerical, management and sales) than for professional categories. Whilstsome professional skills provide a strong source of advantage, the majority donot. The first source of concern must, therefore, be that the UK is, in relationto its trading partners, strong in less complex non-manual skills butcomparatively weak in professional categories (particularly in certain areas of

152 BULLETIN

engineering). It remains, nonetheless, a net exporter of the embodied servicesof professional labour.

A more emphatic result, however, is the almost uniform relative scarcity ofmanual skills in relation to unskilled labour. In aggregate the UK is a majorimporter of the embodied services of both skilled and semi-skilled manuallabour but a proportionately and absolutely much less significant importer ofembodied unskilled labour.

V. TESTING THE VALIDITY OF AGGREGATE SKILL CATEGORIES

To re-iterate, unwarranted aggregation violates the theoretical basis of thefactor content model but excessive aggregation risks overlooking importantsources of international specialization. It is, therefore, worth assessing thevalidity of the aggregation of different skills. The analysis above sought toavoid unwarranted disaggregation by, in effect, erring on the side of aggrega-tion. However, a casual comparison between Tables 1 and 2 shows that themore disaggregated version tends to provide a wide range of exceptions tothe general conclusions concerning professional labour but few in the case ofskilled manual labour. A formal testing procedure is, therefore, appropriate.

The essence of the problem of excessive aggregation is twofold - on theone hand arbitrary disaggregation can invalidate the model and on the otheran inappropriate degree of aggregation can ignore important within categoryvariations. The procedure adopted here is to assess the latter. Thus, if withincategory variations are statistically insignificant in relation to between cate-gory variations we can conclude that the level of aggregation employed doesnot ignore important effects. This is readily tested relative to between categoryvariation by means of analysis of variance.

Table 3 reports such analysis of the variance in the requirements of UK netexports across the 162 occupational groups for three different aggregateclassifications - Keesing's (1965) five category classification of labour, aclassification similar to that of Baldwin (1971) with nine labour categoriesand the classification used in Section IV of this paper (fewer observationswere used in this case due to inadequate degrees of freedom to estimatewithin category variation for some categories).

The results of Table 3 suggest that the aggregation of labour skillsaccording to each classification is valid. They suggest that variation withincategory is statistically insignificant in relation to between category variation.A broad approach to the factor content of trade is, therefore, justifiable.However, care is needed in interpretation. That the most important variationsare between aggregates of factors is not to say that within category variation isinsignificant in an absolute sense as a further comparison between Table 1and Table 2 will confirm.

Thus, the results suggest that broad aggregates are appropriate and a validform of drawing conclusions at the general level. Comparative advantage


TABLE 3Analysis of Variance of Occupational Requirements of Net Exports By Aggregate

Classifications

does appear to be driven more by differences in endowments, say, betweenprofessional and skilled manual labour than by differences in the endow-ments of different types of manual skills. This is not to say that a pattern ofspecialization of secondary importance is non-existent within each aggregate.On the contrary, the evidence of Section IV was that important, if secondary,relative endowment differences do exist between different types of profes-sional labour.

Source of variationDegrees of

Sum of squares freedomMean sumof squares F

(I) Keesing's classification

(a) Direct requirementsBetween category 85768.950 4 21442.238Within category 429059.206 157 2732.861Total

(b) Gross requirements514828.156 161 7.846

Between category 103348.854 4 25837.213Within category 485767.829 157 3094.063Total 589116.683 161 8.35 1

(II) Baldwin's classification

(a) Direct requirementsBetween category 133034.677 8 16629.335Within category 381793.480 153 2495.382

Total(b) Gross requirements

514828.156 161 6.664

Between category 137613.221 8 17201.653Withincategory 451503.463 153 2951.003Total 589116.683 161 5.829

(III) Classification used

(a) Between category 123474.263 9 137 19.363Within category 291343.180 127 2294.041Total

(b) Gross requirements414817.443 136 5.980

Between category 130528.760 9 14503.196Within category 348998.699 127 2748.021Total 479527.459 136 5.278

154 BULLETIN

VI. THE CONTENT OF HIGHER EDUCATED LABOUR IN UK NET EXPORTS

Most earlier studies of this type have tended to equate occupational skillswith 'human capital' - a view with which the author would agree. Since atheoretical discussion of the nature of human capital is beyond the scope ofthis paper, this view is not critically examined here. Occupational skills areexplicitly assumed to constitute human capital. Nonetheless, formal educa-tion of some type is clearly a necessary condition for every type of occupa-tional skill. For this reason some authors have used educational variables tocapture the effects of human capital. The task of this section is, therefore, toask two questions - (i) since education is necessary to practice occupationalskills, what contribution does educated labour make to the net exports of theUK and (ii) is the use of educational variables equivalent to the use of occupa-tional variables?

This section examines both of these questions in the context of highereducation. The choice of higher education rather than all levels of educationis largely a result of data constraints. Nonetheless, the results of this papersuggest a broad pattern of specialization in which the UK exports, onbalance, embodied non-manual labour and imports embodied manual labour.In general, the non-manual/manual distinction might be expected to bebroadly associated with the significant difference in the proportion of eachwork force having received higher education.

Calculations of the requirements of UK net exports in terms of fourcategories of educated labour - those with (i) higher degrees, (ii) first degreesonly, (iii) other higher educational qualifications below first degree level and(iv) no higher education - are reported in Table 4. Data on the qualificationsof the British work force are available by industry at a level of industrial

TABLE 4UK Net Export Requirements by Higher Educational Groupings

Higherdegrees

Firstdegrees

Belowfirstdegree

No highereducation

Net exports (im):Direct 5.41 102.40 27.21 1053.12Gross 4.70 100.96 13.77 - 1820.98

Net exports/consumption - (j) values:Direct 0.01005 0.01669 0.00602 - 0.00921Gross

(ii) Rankings:0.00604 0.01122 0.00212 0.01133

Direct 2 1 3 4Gross 2 1 3 4

EDUCATtONAL CONTENT OF UK NET EXPORTS 155

aggregation that renders direct computation infeasible. However, data on theproportions of the work force with each of the above levels of education isavailable by occupation from: Office of Population Censuses and Surveys1984, Census 1981: Qualified Manpower, London: HMSO. This allowed netexport and consumption requirements of each occupation to be de-composed into their educational components and, thereby, allowed an indi-rect computation of overall requirements for higher educated labour.

The results reported in Table 4 reveal the UK to be relatively wellendowed in all forms of higher education in relation to its trading partners. Ofthe categories the strongest source of advantage was at the level of firstdegree. In contrast, the UK is revealed to be relatively scarce in laboureducated to a standard below that of higher education. The UK, therefore,has a tendency to export highly educated labour but to import less educatedlabour. Relative shortages of educated labour are revealed to exist below thelevel of higher education. This tends to support the earlier contention that theprincipal relative scarcity of skills in the UK is in the area of manual skills.This also provides evidence to support concerns that schooling andvocational training are a source of disadvantage for the UK such as thoseexpressed by Prais (1987) and Steedman (1987).

That higher education is a strong source of comparative advantage and, itscorollary, that a lack of higher education is a source of disadvantage shouldsurprise critics of British higher education. The evidence suggests that thespecialist British higher education system is effective in providing skills of usein world markets. Where education in the UK can be more strongly argued tobe an area of relative weakness is in education at an earlier or morevocational stage.

Whilst both occupational skills and higher education would appear to beimportant determinants of the UKs specialization in world markets, it is farfrom clear that the two could or should be equated. To examine this issueTable 5 reports Spearman's rank correlation coefficients between occupa-tions ranked according to their net export requirements and according to theproportion of the work force educated to various levels. The statistic (Z),which is approximately distributed according to a standard normal distribu-tion, is shown by Bhattacharyya and Johnson (1977) to constitute a test of thenull hypothesis that the two variables are independent. This statistic isreported in each case and was computed as:

Z,J(n-1)R (6.1)

The results reported in Table 5 suggest that we can, in general, reject the nullhypothesis that skill requirements and the proportion of higher educatedworkers by occupation are independent for a wide range of confidence levels.Examination of the rank correlation coefficients reveals a positive associationbetween all forms of higher education and net exports of embodied skills.Conversely, a lack of higher education is shown to be negatively associatedwith the skill content of trade.

156 BULLETIN

TABLE 5Rank Correlations Between UK Net Export Requirements and the Proportion of

Higher Educated Workers, By Occupation

This provides some support for the use of educational measures of humancapital. However, the association between the two types of variable is lessthan perfect. This, inevitably, must reflect the exclusion of other educationalqualifications. It is unlikely that this is the only reason for an imperfectassociation. The evidence is also suggestive (although not conclusive) thatoccupational skills even at the professional level are more than formal educa-tion alone - that training 'on the job' is also important.

VII. CONCLUSIONS

The broad pattern of the UK's comparative advantage in 1984 was that ittended to export, in particular, capital intensive goods and services and, to alesser extent goods and services intensive in non-manual skills. These ittended to exchange for goods intensive in natural resources and in skilled andsemi-skilled manual labour. It was also a proportionately and absolutelysmaller net importer of the embodied services of unskilled labour.

The first implication of this for understanding the basis of the UK's patternof industrial specialization is that the evidence is consistent with the argumentthat skills and education (human capital) are important determinants ofrelative strengths and weaknesses. The primary pattern of specialization

I'roportion of occupation quaIiIed to:Rank correlationcoefficient Z

(A) DIRECT REQUIREMENTS(j) Any higher education 0.354 2.550(ii) Higher degree 0.266 1.9 18

(iii) First degree only 0.366 2.640(iv) (ii)+(iii) 0.360 2.593Below first degree 0.227 1.639No higher education - 0.366 2.640

(B) GROSS REQUIREMENTS(j) Any higher education 0.343 2.473(ii) Higher degree 0.259 1.870

(iii) First degree only 0.358 2.585(iv) (ü)+(iii) 0.352 2.539Below first degree 0.220 1.587No higher education 0.358 2.585


tends to be with respect to broad levels of human capital (for example profes-sional labour) but there is also some evidence of specialization according tocertain specific skills.

Secondly, it is often ailged that the educational system and trainingpractices in the UK are relatively good at training a professional elite butrelatively poor at producing other skilled workers. The results of this studylends support to this type of argument. That the UK is revealed to berelatively abundant in professional/managerial labour (compared to unskilledlabour but not to physical capital) suggests past performance at this level tohave been, at worst, adequate. The relative scarcity of skilled and semi-skilledlabour does, however, provide evidence of inadequacies in education and/ortraining.

Against this it could be correctly argued that we cannot, by definition,expect the UK to be relatively abundant in all factors of production. Nonethe-less, if the education/training of UK labour were an overall source of strengthwe should at least expect skilled manual labour to be abundant relative tounskilled labour (if not to other factors of production) when compared totrading partners. The reverse is found by this study. Moreover, given theimportance of past educational policy in determining current endowments ofhuman capital the implication must point to inadequate performance at thislevel.

Even the conclusion that the UK is relatively strong in a professional!managerial elite is qualified by this study. Professional and managerial labourare, in general, lesser sources of advantage than physical capital or otherwhite collar skills (clerical, sales etc.). Moreover, the disaggregated analysisreveals many professional skills that are apparently relatively scarce in theUK compared to almost all other types of labour. There are, therefore, fewgrounds for complacency concerning past performance in generating humancapital at this level either.

The evidence on higher education also poses a superficial paradox. TheUK exports relatively little embodied professional labour (which has thehighest proportion of higher educated workers by a considerable margin) incomparison to clerical and sales labour, yet the UK is also revealed to be asubstantial net exporter of embodied higher educated labour. However, theresults only compare workers with some form of higher education againstthose without. It, therefore, is probable that the UK is poorly endowed inhigher education relative to the training and education embodied in othernon-manual skills but well endowed in higher education relative to the type ofvocational training required for manual skills. Further work would be neededto confirm this.

Department of Economics, Uni versity of Reading

Date of Receipt of Final Manuscript: September 1992

158 BULLETIN

REFERENCES

Aw, B. Y. (1983). 'The Interpretation of Cross-Section Regression Tests of theHechscher-Ohlin Theorem with Many Goods and Factors', Journal of Inter-national Economics, Vol. 14, PP. 163-67.

Baldwin, Robert E. (1971). 'Determinants of the Commodity Structure of US Trade',American Economic Review, Vol.61, pp. 126-46.

Bhattacharyya, G. K. and Johnson, R. A. (1977). Statistical Concepts and Methods,John Wiley, New York.

Brecher, R. A. and Choudhri, E. U. (1982). 'The Factor Content of InternationalTrade Without Factor Price Equalization', Journal of International Economics, Vol.12, pp.277-83.

Brecher, R. A. and Choudhri, E. U. (1988). 'The Factor Content of Consumption inCanada and the United States: A Two Country Test of the Heckscher-Ohlin-VanekModel', in Feenstra, R. C. (ed.), Empirical Methods for International Trade, MITPress, Cambridge, Mass.

Clifton, D. S. and Marxsen, W. B. (1984). 'An Empirical Investigation of theHeckscher-Ohlin Theorem', Canadian Journal of Economics, Vol. 17, pp. 3 2-8.

Deardorff, A. V. (1982). 'The General Validity of the Heckscher-Ohlin Theorem',American Economic Review, Vol. 72, pp. 683-94.

Deardorf, A. V. (1984). 'Testing Trade Theories and Predicting Trade Flows', inJones R. W. and Kenen, P. B. (eds.), Handbook of International Economics, North-Holland, Amsterdam.

Crafts, N. F. R. and Thomas, M. (1986). 'Comparative Advantage in UK Manufactur-ing Trade 19 10-35', Economic Journal, Vol. 96, pp.629-45.

Gift, R. and Marxsen, W. (1984). 'Aggregation and the Factoral Content of Trade',Journal of Political Economy, Vol. 92, pp. 979-84.

Greenhalgh, C. A. (1990). 'Innovation and Trade Performance in the UnitedKingdom', Economic Journal, Vol. 100, pp. 105-18.

Gremmen, H. J. and Vollebergh, A. H. (1986). 'An Input Approach to Europeancomparative Advantage in Advanced Products: A Study with Special Emphasis onthe Netherlands', Weltwirtschaftliches Archiv, Vol. 122, pp. 270-79.

Hughes, K. S. (1986). 'Exports and Innovation: A Simultaneous Model', EuropeanEconomic Review, Vol. 30, pp. 383-99.

Hamilton, C. and Svensson, L. E. 0. (1983). 'Should Direct or Total Factor Intensitiesbe Used in Tests of the Factor Proportions Hypothesis?', WeitwirtschaftlichesArchiv, Vol. 119, pp.453-62.

Harkness, J. (1983). 'The Factor Proportions Model with Many Nations, Goods andFactors: Theory and Evidence', Review of Economics and Statistics, Vol. 65, pp.298-305.

Hartigan, J. C. and Tower, E. (1986). 'The Leontief Question: A Cobb-DouglasApproach to Simulating the U.S. Income Distribution in Autarky', Weltwirtschaft-liches Archiv, Vol. 122, pp. 677-88.

Helpman, E. (1984). 'The Factor Content of Foreign Trade', Economic Journal, Vol.94, pp. 84-94.

Katrak, H. (1973). 'Human Skills, R and D and Scale Economies in the Exports of theUnited Kingdom and the United States', Oxford Economic Papers, Vol. 25, pp.337-60.


Katrak, H. (1982). 'Labour Skills, R and D and Capital Requirements in the Inter-national Trade and Investment of the United Kingdom', National InstituteEconomic Review, No. 101, pp. 38-47.

Keesing, D. B. (1965). 'Labor Skills and International Trade: Evaluating Many TradeFlows and a Single Measuring Device, Review of Economics and Statistics, Vol. 47,pp. 287-94.

Learner, E. E. (1980). 'The Leontief Paradox, Reconsidered', Journal of PoliticalEconomy, Vol. 88, pp. 495-503.

Learner, E. E. and Bowen, H. P. (1981). 'Cross-Section Tests of the Heckscher-OhlinTheorem: Comment', American Economic Review, Vol. 71, pp. 1040-43.

Leontief, W. W. (1953). 'Domestic Production and Foreign Trade: the AmericanCapital Position Re-Examined', Proceedings of the American Philosophical Society,Vol. 97, pp. 3 32-49.

Maskus, K. E. (1985). 'A Test of the Heckscher-Ohlin-Vanek Theorem: The LeontiefCommonplace', Journal of International Economics, Vol. 19, pp. 201-12.

Prais, S. J. (1987). 'Educating for Productivity: Comparisons of Japanese and EnglishSchooling and Vocational Preparation', National Institute Economic Review, No.119, pp.40-56.

Staiger, R. W. (1986). 'Measurement of the Factor Content of Foreign Trade withTraded Intermediate Goods', Journal of International Economics, Vol. 21, pp.361-68.

Staiger, R. W. (1988). 'A Specification Test of the Heckscher-Ohlin Theory', Journalof Intern ational Economics, Vol. 25, pp. 129-41.

Steedrnan, H. (1987). 'Vocational Training in France and Britain: Office Work',National Institute Economic Review, No. 120, pp.58-70.

Stern, R. M. and Maskus, K. E.(1981). 'Determinants of the Structure of U.S. ForeignTrade 1958-76', Journal of International Economics, Vol. 11, pp. 207-24.

Sveikauskas, L. (1983). 'Science and Technology in United States Foreign Trade',Economic Journal, Vol. 93, pp. 542-54.

Urata, 5. (1983). 'Factor Inputs and Japanese Manufacturing Trade Structure', Reviewof Economics and Statistics, Vol. 65, pp. 678-84.

Vanek, J. (1968). 'The Factor Proportions Theory: The n Factor Case', Kyklos, Vol.2l,pp. 749-56.

Vestal, J. E. (1989). 'Evidence on the Determinants and Factor Content Charac-teristics of Japanese Technology Trade 1977-1981', Review of Economics andStatistics, Vol. 71, pp.565-71.

the skill and higher educational content of uk net exports

Documents