Trade and the Skill Premium Puzzle with Capital Market Imperfections
AbstractAn interesting puzzle is that trade liberalization in the 1980s and 1990s has been associated with a sharp increase in the skill premium in both developed and developing countries. This is in contrast with neoclassical theory, according to which trade should increase the relative return of the relatively abundant factor. We develop a simple model of trade with capital market imperfections, and show that trade can increase the skill premium in both the North and the South, and both in the short run as well as in the long run. We show that trade with a skill-intensive economy has two effects: it reduces the skilled wage, and thus discourages non talented agents out of the skilled labor force; and it reduces the cost of subsistence, thus allowing the talented offspring of unskilled workers to go to school. This compositional effect has a positive effect on the observed skill premium, possibly strong enough to counterweight the decrease in the skilled wage.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Economic Organisation and Public Policy Discussion Papers Series with number 020.
Date of creation: Nov 2010
Date of revision:
Contact details of provider:
Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp
Trade Liberalization; Skill Premium; Credit Market Frictions; Latin America;
Other versions of this item:
- Bonfatti, Roberto & Ghatak, Maitreesh, 2011. "Trade and the Skill Premium Puzzle with Capital Market Imperfections," CEPR Discussion Papers 8286, C.E.P.R. Discussion Papers.
- F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
- O15 - Economic Development, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-02-26 (All new papers)
- NEP-DEV-2011-02-26 (Development)
- NEP-DGE-2011-02-26 (Dynamic General Equilibrium)
- NEP-INT-2011-02-26 (International Trade)
- NEP-LAB-2011-02-26 (Labour Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ranjan, Priya, 2001.
"Credit constraints and the phenomenon of child labor,"
Journal of Development Economics,
Elsevier, vol. 64(1), pages 81-102, February.
- Ranjan, P., 1999. ""Credit Constraints and the Phenomenon of Child Labor"," Papers 98-99-12, California Irvine - School of Social Sciences.
- Das, Satya P., 2006. "Trade, skill acquisition and distribution," Journal of Development Economics, Elsevier, vol. 81(1), pages 118-141, October.
- Orazio Attanasio & Pinelopi Goldberg & Nina Pavcnik, 2003.
"Trade Reforms and Wage Inequiality in Colombia,"
NBER Working Papers
9830, National Bureau of Economic Research, Inc.
- Wacziarg, Romain & Seddon, Jessica, 2000.
"Trade Liberalization and Intersectoral Labor Movements,"
1652, Stanford University, Graduate School of Business.
- Wacziarg, Romain & Wallack, Jessica Seddon, 2004. "Trade liberalization and intersectoral labor movements," Journal of International Economics, Elsevier, vol. 64(2), pages 411-439, December.
- Chesnokova, Tatyana & Krishna, Kala, 2009.
"Skill acquisition, credit constraints, and trade,"
International Review of Economics & Finance,
Elsevier, vol. 18(2), pages 227-238, March.
- Ranjan, Priya, 2001. "Dynamic evolution of income distribution and credit-constrained human capital investment in open economies," Journal of International Economics, Elsevier, vol. 55(2), pages 329-358, December.
- Nancy L. Stokey, 1990.
"Human Capital, Product Quality, and Growth,"
883, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Kenneth Kletzer and Pranab Bardhan., 1986.
"Credit Markets and Patterns of International Trade,"
Economics Working Papers
8612, University of California at Berkeley.
- Kletzer, Kenneth & Bardhan, Pranab, 1987. "Credit markets and patterns of international trade," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 57-70, October.
- Kletzer, Kenneth & Bardhan, Pranab, 1986. "Credit Markets and Patterns of International Trade," Department of Economics, Working Paper Series qt1g36f3sd, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Naércio Aquino Menezes-Filho & Marc-Andreas Muendler, 2011.
"Labor Reallocation in Response to Trade Reform,"
NBER Working Papers
17372, National Bureau of Economic Research, Inc.
- Muendler, Marc-Andreas, 2007. "Labor Reallocation in Response to Trade Reform," University of California at San Diego, Economics Working Paper Series qt3cm38535, Department of Economics, UC San Diego.
- Naércio Aquino Menezes Filho & Marc-Andreas Muendler, 2007. "Labor Reallocation in Response to Trade Reform," CESifo Working Paper Series 1936, CESifo Group Munich.
- Ranjan, Priya, 2003. "Trade induced convergence through human capital accumulation in credit-constrained economies," Journal of Development Economics, Elsevier, vol. 72(1), pages 139-162, October.
- Bonfatti, Roberto & Ghatak, Maitreesh, 2013. "Trade and the allocation of talent with capital market imperfections," Journal of International Economics, Elsevier, vol. 89(1), pages 187-201.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.