An explanation of observed differences in output (value added) per man among developed countries and manufacturing industries. Statistical factor analysis is introduced and applied to derive a new production function which distinguishes between skilled and unskilled labor. Assuming competitive markets for goods and labor, identical production functions, and similar relative prices in all countries, differences in productivity and relative wages are shown to be explained by the relative proportions of the highly skilled workers. Examination of rates of return on capital suggests that capital tends to be mobile among countries. Therefore, countries well endowed with skilled labor should export goods produced in skill-intensive industries.