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Factor Price Overshooting with Trade Liberalization: Theory and Evidence

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  • Julian Emami Namini

    (Erasmus University Rotterdam)

  • Ricardo Lopez

    ()
    (International Business School, Brandeis University)

Abstract

This paper develops an intra-industry trade model with skilled and unskilled labor as factors of production, endogenous accumulation of skilled labor and firm heterogeneity in factor intensities to examine the effect of trade reforms on factor prices. Since exporters are more skill intensive than non-exporters, a decrease in trade barriers initially increases wage inequality between skilled and unskilled worker, as a result of an increase in the relative demand for skilled labor. Over time, however, as agents respond to the change in relative wages by investing in skilled labor, the relative wage of skilled labor decreases. Evidence from Chilean plant-level data supports the idea of factor price overshooting with trade liberalization.

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File URL: http://www.brandeis.edu/departments/economics/RePEc/brd/doc/Brandeis_WP52.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by Brandeis University, Department of Economics and International Businesss School in its series Working Papers with number 52.

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Length: 66 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:brd:wpaper:52

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Postal: MS032, P.O. Box 9110, Waltham, MA 02454-9110
Web page: http://www.brandeis.edu/departments/economics/
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Keywords: Intra-industry trade; Firm heterogeneity in factor intensities; Wage inequal- ity; Overshooting; Impact versus long run effect; Chile;

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