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International Competition, Returns to Skill and Labor Market Adjustment

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  • Rod Falvey
  • David Greenaway
  • Joana Silva

Abstract

This paper examines whether increased import competition induces domestic workers to skill upgrade and/or switch industries. The analysis makes use of a large unique longitudinal matched employer-employee dataset that covers virtually all workers and firms in Portugal over the 1986-2000 period. Our identification strategy uses two exogenous changes in the degree of international competition. First, we exploit the strong appreciation of the Portuguese currency in 1989-1992 and pre-existing differences in trade exposure across industries in a differences-in-differences estimation. Second, we make use of changes in industry-specific (source-weighted) real exchange rates. A bivariate probit model is used to analyse the impact of increased international competition on skill-upgrading and/or industry switching. Based on both empirical strategies, and on two different skill definitions, we find strong confirmation for the hypothesis that increased international competition increases the returns to skill and induces skill upgrading.

Suggested Citation

  • Rod Falvey & David Greenaway & Joana Silva, 2008. "International Competition, Returns to Skill and Labor Market Adjustment," Discussion Papers 08/10, University of Nottingham, GEP.
    • Handle: RePEc:not:notgep:08/10
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    Cited by:

    1. Peter W. Wright & Paulo Bastos, 2012. "Exchange Rates and Wages in Unionized Labor Markets," ILR Review, Cornell University, ILR School, vol. 65(4), pages 975-999, October.
    2. Nakhoda, Aadil, 2012. "The effect of foreign competition on product switching activities: A firm level analysis," MPRA Paper 39167, University Library of Munich, Germany.
    3. Falvey, Rod & Greenaway, David & Silva, Joana, 2010. "Trade liberalisation and human capital adjustment," Journal of International Economics, Elsevier, vol. 81(2), pages 230-239, July.
    4. Sly, Nicholas, 2010. "Skill Acquisition, Incentive Contracts and Jobs: Labor Market Adjustment to Trade," MPRA Paper 25004, University Library of Munich, Germany.

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