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Trade integration and the skill premium: Evidence from a transition economy

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  • Cho, Sang-Wook (Stanley)
  • Díaz, Julián P.

Abstract

Relatively little attention has been given to documenting the evolution of the skill premium (defined as the ratio of the wages of skilled to unskilled workers) in the economies of Central and Eastern Europe, most likely due to the lack of readily available data. In this article, we first uncover the patterns of the skill premium for a subset of transition economies, and then we turn our focus to the case of Slovenia, where we highlight the negative correlation between the skill premium and international trade after 2000, when Slovenia’s trade with its largest partner, the European Union (EU), increased and intensified. To conduct our analysis, we develop an applied general equilibrium model, and combining a Social Accounting Matrix, Household Budget Surveys, and the EU KLEMS Growth and Productivity Accounts database, we calibrate it to match the Slovenian data. We next perform a numerical experiment that consists of Slovenia joining the EU and quantify the impact of this trade integration process on the skill premium. We also conduct additional sensitivity experiments to quantify how our model’s predictions vary with some of the model’s parameters, including the role of sectoral productivity growth. We find that trade liberalization leads to a fall in the skill premium of roughly up to 4.5%. This implies that our model is able to account for approximately 46% of the actual decrease in the skill premium observed in Slovenia for our period of analysis.

Suggested Citation

  • Cho, Sang-Wook (Stanley) & Díaz, Julián P., 2013. "Trade integration and the skill premium: Evidence from a transition economy," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 601-620.
  • Handle: RePEc:eee:jcecon:v:41:y:2013:i:2:p:601-620
    DOI: 10.1016/j.jce.2012.08.002
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    References listed on IDEAS

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    1. Per Krusell & Lee E. Ohanian & JosÈ-Victor RÌos-Rull & Giovanni L. Violante, 2000. "Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis," Econometrica, Econometric Society, vol. 68(5), pages 1029-1054, September.
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    4. L. ALAN WINTERS & NEIL McCULLOCH & ANDREW McKAY, 2015. "Trade Liberalization and Poverty: The Evidence So Far," World Scientific Book Chapters,in: Non-Tariff Barriers, Regionalism and Poverty Essays in Applied International Trade Analysis, chapter 14, pages 271-314 World Scientific Publishing Co. Pte. Ltd..
    5. Sang‐Wook (Stanley) Cho & Julian P. Diaz, 2011. "The Welfare Impact Of Trade Liberalization," Economic Inquiry, Western Economic Association International, vol. 49(2), pages 379-397, April.
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    7. Manoj Atolia & Yoshinori Kurokawa, 2008. "Variety Trade and Skill Premium in a Calibrated General Equilibrium Model: The Case of Mexico," Working Papers wp2008_11_03, Department of Economics, Florida State University.
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    Cited by:

    1. Atolia, Manoj & Kurokawa, Yoshinori, 2016. "The impact of trade margins on the skill premium: Evidence from Mexico," Journal of Policy Modeling, Elsevier, vol. 38(5), pages 895-915.
    2. Sang-Wook (Stanley) Cho & Juliàn P. Dìaz, 2014. "Accounting for Skill Premium Patterns during the EU Accession: Productivity or Trade?," Discussion Papers 2014-14, School of Economics, The University of New South Wales.

    More about this item

    Keywords

    Skill premium; Transition economies; Integration;

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • P36 - Economic Systems - - Socialist Institutions and Their Transitions - - - Consumer Economics; Health; Education and Training; Welfare, Income, Wealth, and Poverty

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