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Intraindustry trade and the skill premium: Theory and evidence

  • Dinopoulos, Elias
  • Syropoulos, Constantinos
  • Xu, Bin
  • Yotov, Yoto V.

We explore theoretically and empirically the relationship between intraindustry trade and the skill premium. Our model features a Chamberlinian-type mechanism of income distribution based on quasi-homothetic consumer preferences, non-homothetic production, and factor-biased scale economies at the firm level. The analysis focuses on a two-country, one-sector model of intraindustry trade with two factor inputs consisting of high-skilled and low-skilled labor. We find that a move from autarky to free trade (a) raises the output of the representative firm and its level of total factor productivity, and (b) reduces (raises) the relative wage of high-skilled workers under the hypothesis of output-skill substitutability (output-skill complementarity). Plant-level evidence from Mexico supports the empirical relevance of the proposed income-distribution mechanism.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 84 (2011)
Issue (Month): 1 (May)
Pages: 15-25

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Handle: RePEc:eee:inecon:v:84:y:2011:i:1:p:15-25
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