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Trade impacts on skill formation: welfare improvements accompanied by rises in inequality

Author

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  • Yasuhiro Sato

    (Graduate School of Environmental Studies, Nagoya University (Japan))

  • Kazuhiro Yamamoto

    (Graduate School of Economics, Osaka University, (Japan))

Abstract

In this paper, we focus on the skill formation when considering the trade impacts on labor markets. Although workers are identical as unskilled labor, they differ in their productivity as skilled. Workers become skilled by incurring the training costs. Introducing the above settings into a trade model with monopolistic competition, we show that trade opening enhances skill formation. This is because trade enriches the varieties of differentiated goods and raises the utility of a worker for a given income. This effect works stronger for the skilled than for the unskilled although it makes all agents better off, leading to higher skill formation. However, it may be accompanied by rises in the real wage disparity between skilled and unskilled workers and by rises in the skilled wage inequality. Finally, we examine the possible effects of foreign direct investment on the labor market structure as well.

Suggested Citation

  • Yasuhiro Sato & Kazuhiro Yamamoto, 2007. "Trade impacts on skill formation: welfare improvements accompanied by rises in inequality," Discussion Papers in Economics and Business 07-12, Osaka University, Graduate School of Economics.
    • Handle: RePEc:osk:wpaper:0712
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    References listed on IDEAS

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    Cited by:

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    2. Santra, Sattwik, 2014. "Non-homothetic preferences: Explaining unidirectional movements in wage differentials," Journal of Development Economics, Elsevier, vol. 109(C), pages 87-97.

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    More about this item

    Keywords

    trade; skill formation; monopolistic competition; wage inequality; FDI;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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