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Trade liberalisation, skill-biased technical change and wages in developing countries: a model with heterogeneous firms

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  • Mauro Caselli

Abstract

This paper analyses the effects of trade liberalisation and technical change on real and relative wages.� It builds a model with monopolistic competition, heterogeneous firms and two countries, North and South, and solves it numerically.� Skill-biased technical change, caused by decreases in the price of imported equipment as a result of reduced trade costs or falls in its world price, tends to increase the relative wages of skilled workers.� This increase in the skill premium can occur even in skill-scarce developing countries, as has often been observed in reality, even though Stolper-Samuelson effects pull the other way.� What drives the rise in skilled wages when imported equipment becomes cheaper is the rise in demand for skilled workers in the most productive firms in each sector.� Whether or not real unskilled wages increase absolutely after trade liberalisation appears to depend on whether trade costs are ad valorem or per-unit.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number CSAE WPS/2010-27.

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Date of creation: 01 Aug 2010
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Handle: RePEc:oxf:wpaper:csae-wps/2010-27

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Keywords: Trade liberalisation; skill-biased technical change; wage inequality; real wages; equipment-skill complementarity;

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  1. Gonzague Vannoorenberghe, 2011. "Trade between symmetric countries, heterogeneous firms, and the skill premium," Canadian Journal of Economics, Canadian Economics Association, vol. 44(1), pages 148-170, February.
  2. Epifani, Paolo & Gancia, Gino, 2002. "The Skill Bias of World Trade," Seminar Papers 707, Stockholm University, Institute for International Economic Studies.
  3. Leonardi, Marco, 2003. "Firm Heterogeneity in Capital/Labor Ratios and Wage Inequality," IZA Discussion Papers 909, Institute for the Study of Labor (IZA).
  4. Mauro Caselli, 2014. "Trade, skill-biased technical change and wages in Mexican manufacturing," Applied Economics, Taylor & Francis Journals, vol. 46(3), pages 336-348, January.
  5. Andrew B. Bernard & Stephen Redding & Peter K. Schott, 2004. "Comparative advantage and heterogeneous firms," LSE Research Online Documents on Economics 3700, London School of Economics and Political Science, LSE Library.
  6. Ronald W. Jones, 1965. "The Structure of Simple General Equilibrium Models," Journal of Political Economy, University of Chicago Press, vol. 73, pages 557.
  7. Christian Broda & David E. Weinstein, 2004. "Globalization and the Gains from Variety," NBER Working Papers 10314, National Bureau of Economic Research, Inc.
  8. Adrian Wood, 2002. "Globalization and wage inequalities: A synthesis of three theories," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 138(1), pages 54-82, March.
  9. Robert C. Feenstra & Gordon H. Hanson, 1995. "Foreign Direct Investment and Relative Wages: Evidence from Mexico's Maquiladoras," NBER Working Papers 5122, National Bureau of Economic Research, Inc.
  10. Anderson, Edward, 2005. "Openness and inequality in developing countries: A review of theory and recent evidence," World Development, Elsevier, vol. 33(7), pages 1045-1063, July.
  11. Irarrazabal, Alfonso & Moxnes, Andreas & Opromolla, Luca David, 2010. "The Tip of the Iceberg: Modeling Trade Costs and Implications for Intra-Industry Reallocation," CEPR Discussion Papers 7685, C.E.P.R. Discussion Papers.
  12. Daron Acemoglu, 2007. "Introduction to Modern Economic Growth," Levine's Bibliography 122247000000001721, UCLA Department of Economics.
  13. Alberto Behar, 2009. "Directed technical change, the elasticity of substitution and wage inequality in developing countries," Economics Series Working Papers 467, University of Oxford, Department of Economics.
  14. Bernard, A.B. & Jensen, J.B., 1994. "Exporters, Skill Upgrading, and the Wage Gap," Working papers 94-30, Massachusetts Institute of Technology (MIT), Department of Economics.
  15. Daron Acemoglu, 2000. "Technical Change, Inequality, and the Labor Market," NBER Working Papers 7800, National Bureau of Economic Research, Inc.
  16. Elena Meschi & Erol Taymaz & Marco Vivarelli, 2009. "Trade, Technology and Skills: Evidence from Turkish Microdata," Jena Economic Research Papers 2009-097, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
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