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International trade, skill premium and endogenous labor division: The case of Mexico

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  • Madanizadeh, Seyed Ali

Abstract

Why trade liberalizations increase the skill premium? To explain this empirical evidence that is in contrast with the conventional theory of Heckscher-Ohlin, I build up a general equilibrium micro-founded heterogeneous-firm model of international trade where firms make decisions on their division of labor, and firms’ skill-intensities are endogenously determined. I show why the exporters are generally more productive and skill intensive and how trade cost reductions induce more productive firms to choose a higher degree of labor specialization, become more skill intensive and start to export. I further demonstrate how such internal horizontal organizational changes, after a trade cost reduction, can directly increase aggregate skill intensity and the relative demand for skilled workers, resulting in higher skill premium in a general equilibrium setting. Lastly, I calibrate this model to the Mexican data to quantify the rise in the skill premium in the period of its trade liberalization 1985~1993.

Suggested Citation

  • Madanizadeh, Seyed Ali, 2021. "International trade, skill premium and endogenous labor division: The case of Mexico," Labour Economics, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:labeco:v:71:y:2021:i:c:s0927537121000658
    DOI: 10.1016/j.labeco.2021.102030
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    More about this item

    Keywords

    Skill premium; International trade; Labor specialization; Endogenous skill intensity; Firm organization; Trade liberalization;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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