An analysis of the hypothesis that labor quality is a key determinant of international differences in productivity and wages. In recent empirical work on the estimation of cross-national production functions, it has generally been assumed that labor is homogeneous, and complemented by a single factor of production, capital. These assumptions lead to a very incomplete explanation of international differences in labor productivity and wages, and account not at all for the systematic variation of wages over industries. This simple capital-labor model can also lead to incorrect predictions about international specialization, primarily because labor quality differs substantially over nations. Attempts to introduce labor quality into the analysis encounter one major obstacle--the absence of data measuring the skills of workers in different countries. The analysis presented in this study shows that a more general model incorporating two imperfectly substitutable types of labor can offer a significant improvement in explaining the overall pattern of labor productivity, wages, and international trade among developed countries and within manufacturing industries. 32 pp.