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Factor price overshooting with trade liberalization: theory and evidence

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  • Julian Emami Namini
  • Ricardo A. López

Abstract

This paper develops an intra-industry trade model with skilled and unskilled labor as factors of production, endogenous accumulation of skilled labor and firm heterogeneity in factor intensities to examine the effect of trade reforms on factor prices. Since exporters are more skill intensive than non-exporters, a decrease in trade barriers initially increases wage inequality between skilled and unskilled worker, as a result of an increase in the relative demand for skilled labor. Over time, however, as agents respond to the change in relative wages by investing in skilled labor, the relative wage of skilled labor decreases. Evidence from Chilean plant-level data supports the idea of factor price overshooting with trade liberalization.
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Suggested Citation

  • Julian Emami Namini & Ricardo A. López, 2013. "Factor price overshooting with trade liberalization: theory and evidence," Scottish Journal of Political Economy, Scottish Economic Society, vol. 60(2), pages 139-181, May.
    • Handle: RePEc:bla:scotjp:v:60:y:2013:i:2:p:139-181
    DOI: sjpe.12006
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    File URL: http://hdl.handle.net/10.1111/sjpe.12006
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    Cited by:

    1. Köse Tuna & Avcı Mehmet & Aktan Murat, 2025. "The Role of Technology Intensity in Shaping Skilled Labor Demand Through Imports: The Case of Türkiye," Economics - The Open-Access, Open-Assessment Journal, De Gruyter, vol. 19(1), pages 1-15.
    2. Yoshimichi Murakami, 2018. "Globalization and Income Inequality in Latin America: A Review of Theoretical Developments and Recent Evidence," Discussion Paper Series DP2018-16, Research Institute for Economics & Business Administration, Kobe University, revised Aug 2018.
    3. Michele Raitano & Francesco Vona, 2017. "Competition, firm size and returns to skills: Evidence from currency shocks and market liberalisations," The World Economy, Wiley Blackwell, vol. 40(12), pages 2676-2703, December.
    4. Yoshimichi Murakami, 2021. "Trade liberalization and wage inequality: Evidence from Chile," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 30(3), pages 407-438, April.

    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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