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Trade and the allocation of talent with capital market imperfections

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Listed author(s):
  • Bonfatti, Roberto
  • Ghatak, Maitreesh

Abstract

Trade liberalization in the 1980s and 1990s has been associated with a sharp increase in the skill premium in both developed and developing countries. This is in apparent conflict with neoclassical theory, according to which trade should decrease the relative return on the relatively scarce factor, and thus decrease the skill premium in skill-scarce developing countries. We develop a simple model of trade with talent heterogeneity and capital market imperfections, and show that trade can increase the skill premium in a skill-scarce South that opens up to a skill-abundant North, both in the short run as well as in the long run. We show that trade has two effects: it reduces the skilled wage, and therefore drives non talented agents out of the skilled labor force. It also reduces the cost of subsistence, thereby allowing the talented offspring of unskilled workers to go to school. This compositional effect has a positive effect on the observed skill premium, potentially strong enough to outweigh the decrease in the skilled wage. In our framework, trade liberalization may trigger an increase in the skill-premium in both the North and the South.

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File URL: http://www.sciencedirect.com/science/article/pii/S0022199612001316
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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 89 (2013)
Issue (Month): 1 ()
Pages: 187-201

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Handle: RePEc:eee:inecon:v:89:y:2013:i:1:p:187-201
DOI: 10.1016/j.jinteco.2012.07.005
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

Keywords: Trade liberalization; Talent heterogeneity; Skill premium; Credit market frictions;

Find related papers by JEL classification:

  • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
  • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
  • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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  1. Krisztina Kis-Katos & Robert Sparrow, 2011. "Child Labor and Trade Liberalization in Indonesia," Journal of Human Resources, University of Wisconsin Press, vol. 46(4), pages 722-749.
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  17. Roberto Bonfatti & Maitreesh Ghatak, 2010. "Trade and the Skill Premium Puzzle with Capital Market Imperfections," STICERD - Economic Organisation and Public Policy Discussion Papers Series 020, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  18. Edmonds, Eric V. & Pavcnik, Nina, 2005. "The effect of trade liberalization on child labor," Journal of International Economics, Elsevier, vol. 65(2), pages 401-419, March.
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Cited by:

  1. Nathalie Chusseau & Joël Hellier, 2012. "Globalisation and Inequality: Where do we stand?," Journal of Income Distribution, Journal of Income Distribution, vol. 21(3-4), pages 7-34, November.
  2. Unel Bulent, 2015. "Human Capital Formation and International Trade," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 15(3), pages 1067-1092, July.
  3. Raveh, Ohad & Reshef, Ariell, 2016. "Capital imports composition, complementarities, and the skill premium in developing countries," Journal of Development Economics, Elsevier, vol. 118(C), pages 183-206.

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