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

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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.

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Bibliographic Info

Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 07-12.

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Length: 20 pages
Date of creation: Apr 2007
Date of revision:
Handle: RePEc:osk:wpaper:0712

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Web page: http://www.econ.osaka-u.ac.jp/
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Keywords: trade; skill formation; monopolistic competition; wage inequality; FDI;

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  1. Gianmarco Ottaviano & Takatoshi Tabuchi & Jacques-Francois Tissse, 1999. "Agglomeration and Trade Revisited," CIRJE F-Series CIRJE-F-65, CIRJE, Faculty of Economics, University of Tokyo.
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  16. Robert E. Baldwin & Glen G. Cain, 1997. "Shifts in U.S. Relative Wages: The Role of Trade, Technology and Factor Endowments," NBER Working Papers 5934, National Bureau of Economic Research, Inc.
  17. Fields, Gary S, 1994. "Changing Labor Market Conditions and Economic Development in Hong Kong, the Republic of Korea, Singapore, and Taiwan, China," World Bank Economic Review, World Bank Group, vol. 8(3), pages 395-414, September.
  18. Thomas Lemieux, 2006. "Increasing Residual Wage Inequality: Composition Effects, Noisy Data, or Rising Demand for Skill?," American Economic Review, American Economic Association, vol. 96(3), pages 461-498, June.
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