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Trade Liberalisation and Human Capital Adjustment

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  • Rod Falvey
  • David Greenaway
  • Joana Silva

Abstract

This paper highlights the way in which workers of different age and ability are affected by anticipated and unanticipated trade liberalisations. A two-factor (skilled and unskilled labour), two-sector Heckscher-Ohlin model is supplemented with an education sector which uses skilled labour and time to convert unskilled into skilled workers. A skilled worker’s income depends on ability, but all unskilled workers have the same income. Trade liberalisation in an abundant country increases the relative wage and induces skill upgrading by existing workforce. Younger and more able workers are most likely to upgrade, but not all are better off after liberalisation: Older and less able upgraders are likely to lose. For an anticipated liberalisation the preferred upgrading strategies depend on ability and much of the upgrading takes place before liberalisation. This implies that some workers who would have upgraded had they anticipated the liberalisation will not do so if it is unanticipated, and post-liberalisation adjustment assistance will fail to compensate some losers and distort the upgrading decisions of others.

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Bibliographic Info

Paper provided by University of Nottingham, GEP in its series Discussion Papers with number 07/34.

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Handle: RePEc:not:notgep:07/34

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Keywords: International trade; Factor mobility; Labour market adjustment;

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References

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  1. Erhan Artuç & Shubham Chaudhuri & John McLaren, 2007. "Delay and Dynamics in Labor Market Adjustment: Simulation Results," Koç University-TUSIAD Economic Research Forum Working Papers, Koc University-TUSIAD Economic Research Forum 0703, Koc University-TUSIAD Economic Research Forum.
  2. Paul Segerstrom & Elias Dinopoulos, 1999. "A Schumpeterian Model of Protection and Relative Wages," American Economic Review, American Economic Association, American Economic Association, vol. 89(3), pages 450-472, June.
  3. Feenstra, R.C. & Lewis, T.R., 1989. "Trade Adjustment Assistance And Pareto Gains From Trade," Papers, California Davis - Institute of Governmental Affairs 343, California Davis - Institute of Governmental Affairs.
  4. Matusz, Steven J. & Tarr, David, 1999. "Adjusting to trade policy reform," Policy Research Working Paper Series, The World Bank 2142, The World Bank.
  5. David Card & Thomas Lemieux, 2000. "Can Falling Supply Explain the Rising Return to College for Younger Men? A Cohort-Based Analysis," NBER Working Papers 7655, National Bureau of Economic Research, Inc.
  6. Ngo Van Long & Raymond Riezman & Antoine Soubeyran, 2003. "Trade, Wage Gaps, and Specific Human Capital Accumulation," CESifo Working Paper Series, CESifo Group Munich 911, CESifo Group Munich.
  7. Lori G. Kletzer, 2004. "Trade-related Job Loss and Wage Insurance: a Synthetic Review," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 12(5), pages 724-748, November.
  8. Carl Davidson & Steven J. Matusz, 2006. "Trade Liberalization And Compensation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 723-747, 08.
  9. Udo Kreickemeier, 2009. "Trade, technology, and unemployment: the role of endogenous skill formation," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 42(2), pages 639-664, May.
  10. Borsook, I., 1987. "Earnings, ability and international trade," Journal of International Economics, Elsevier, Elsevier, vol. 22(3-4), pages 281-295, May.
  11. Davidson, Carl & Matusz, Steven J. & Nelson, Douglas R., 2007. "Can compensation save free trade?," Journal of International Economics, Elsevier, Elsevier, vol. 71(1), pages 167-186, March.
  12. Neary, J Peter, 1978. "Capital Subsidies and Employment in an Open Economy," Oxford Economic Papers, Oxford University Press, Oxford University Press, vol. 30(3), pages 334-56, November.
  13. Caroline L. Freund & John McLaren, 1999. "On the dynamics of trade diversion: evidence from four trade blocs," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 637, Board of Governors of the Federal Reserve System (U.S.).
  14. Martin, John P, 1976. "Variable Factor Supplies and the Heckscher-Ohlin-Samuelson Model," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 86(344), pages 820-31, December.
  15. Findlay, Ronald & Kierzkowski, Henryk, 1983. "International Trade and Human Capital: A Simple General Equilibrium Model," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(6), pages 957-78, December.
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Citations

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Cited by:
  1. Blanchard, Emily & Willmann, Gerald, 2011. "Escaping a protectionist rut: Policy mechanisms for trade reform in a democracy," Journal of International Economics, Elsevier, Elsevier, vol. 85(1), pages 72-85, September.
  2. Carl Davidson & Nicholas Sly, 2013. "A Simple Model of Globalization, Schooling and Skill Acquisition," CESifo Working Paper Series, CESifo Group Munich 4394, CESifo Group Munich.
  3. Fabien CANDAU & Elisa DIENESCH, 2013. "Globalization, Spatial Sorting and the Geography of Education," Working Papers, CATT - UPPA - Université de Pau et des Pays de l'Adour 2012-2013_7, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Dec 2013.
  4. Emily Blanchard & Gerald Willmann, 2013. "Trade, Education, and the Shrinking Middle Class," CESifo Working Paper Series, CESifo Group Munich 4141, CESifo Group Munich.
  5. ICHIDA Toshihiro, 2011. "A Model of Multi-Dimensional Human Capital Investment: Specific vs. general investments under uncertainty," Discussion papers, Research Institute of Economy, Trade and Industry (RIETI) 11056, Research Institute of Economy, Trade and Industry (RIETI).
  6. Joël Hellier, 2012. "The North-South HOS Model, inequality and globalization," Working Papers, ECINEQ, Society for the Study of Economic Inequality 244, ECINEQ, Society for the Study of Economic Inequality.
  7. Harris, Richard G. & Robertson, Peter E., 2013. "Trade, wages and skill accumulation in the emerging giants," Journal of International Economics, Elsevier, Elsevier, vol. 89(2), pages 407-421.
  8. Rod Falvey & David Greenaway & Joana Silva, . "International Competition, Returns to Skill and Labor Market Adjustment," Discussion Papers, University of Nottingham, GEP 08/10, University of Nottingham, GEP.
  9. Artuc, Erhan, 2012. "Workers'age and the impact of trade shocks," Policy Research Working Paper Series, The World Bank 6035, The World Bank.
  10. Emily Blanchard & Gerald Willmann, 2007. "Political Stasis or Protectionist Rut? Policy Mechanisms for Trade Reform in a Democracy," CESifo Working Paper Series, CESifo Group Munich 2070, CESifo Group Munich.

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