IDEAS home Printed from https://ideas.repec.org/p/brd/wpaper/52.html
   My bibliography  Save this paper

Factor Price Overshooting with Trade Liberalization: Theory and Evidence

Author

Listed:
  • Julian Emami Namini

    (Erasmus University Rotterdam)

  • Ricardo Lopez

    () (International Business School, Brandeis University)

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.

Suggested Citation

  • Julian Emami Namini & Ricardo Lopez, 2012. "Factor Price Overshooting with Trade Liberalization: Theory and Evidence," Working Papers 52, Brandeis University, Department of Economics and International Businesss School.
    • Handle: RePEc:brd:wpaper:52
    as

    Download full text from publisher

    File URL: http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP52.pdf
    File Function: First version, 2012
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Roberto Alvarez & Ricardo López, 2005. "Exporting and performance: evidence from Chilean plants," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1384-1400, November.
    2. Gonzaga, Gustavo & Menezes Filho, Naercio & Terra, Cristina, 2006. "Trade liberalization and the evolution of skill earnings differentials in Brazil," Journal of International Economics, Elsevier, vol. 68(2), pages 345-367, March.
    3. repec:ucp:jpolec:doi:10.1086/693373 is not listed on IDEAS
    4. Eric A. Verhoogen, 2008. "Trade, Quality Upgrading, and Wage Inequality in the Mexican Manufacturing Sector," The Quarterly Journal of Economics, Oxford University Press, vol. 123(2), pages 489-530.
    5. Emami Namini, Julian & Facchini, Giovanni & Lopez, Ricardo, 2011. "Export growth and factor market competition: theory and evidence," CEPR Discussion Papers 8256, C.E.P.R. Discussion Papers.
    6. Findlay, Ronald & Kierzkowski, Henryk, 1983. "International Trade and Human Capital: A Simple General Equilibrium Model," Journal of Political Economy, University of Chicago Press, vol. 91(6), pages 957-978, December.
    7. Galiani, Sebastian & Sanguinetti, Pablo, 2003. "The impact of trade liberalization on wage inequality: evidence from Argentina," Journal of Development Economics, Elsevier, vol. 72(2), pages 497-513, December.
    8. Robertson, Raymond, 2003. "Exchange rates and relative wages: evidence from Mexico," The North American Journal of Economics and Finance, Elsevier, vol. 14(1), pages 25-48, March.
    9. Pablo Acosta & Gabriel V. Montes-Rojas, 2008. "Trade Reform and Inequality: The Case of Mexico and Argentina in the 1990s," The World Economy, Wiley Blackwell, vol. 31(6), pages 763-780, June.
    10. Stephen Tokarick, 2005. "Quantifying the Impact of Trade on Wages: the Role of Nontraded Goods," Review of International Economics, Wiley Blackwell, vol. 13(5), pages 841-860, November.
    11. Leamer, Edward E. & Maul, Hugo & Rodriguez, Sergio & Schott, Peter K., 1999. "Does natural resource abundance increase Latin American income inequality?," Journal of Development Economics, Elsevier, vol. 59(1), pages 3-42, June.
    12. Jones, Ronald W. & Easton, Stephen T., 1983. "Factor intensities and factor substitution in general equilibrium," Journal of International Economics, Elsevier, vol. 15(1-2), pages 65-99, August.
    13. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 295-316.
    14. Gonzague Vannoorenberghe, 2011. "Trade between symmetric countries, heterogeneous firms, and the skill premium," Canadian Journal of Economics, Canadian Economics Association, vol. 44(1), pages 148-170, February.
    15. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-1297, November.
    16. Attanasio, Orazio & Goldberg, Pinelopi K. & Pavcnik, Nina, 2004. "Trade reforms and wage inequality in Colombia," Journal of Development Economics, Elsevier, vol. 74(2), pages 331-366, August.
    17. Elhanan Helpman & Oleg Itskhoki & Stephen Redding, 2010. "Inequality and Unemployment in a Global Economy," Econometrica, Econometric Society, vol. 78(4), pages 1239-1283, July.
    18. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    19. James Harrigan & Ariell Reshef, 2015. "Skill-biased heterogeneous firms, trade liberalization and the skill premium," Canadian Journal of Economics, Canadian Economics Association, vol. 48(3), pages 1024-1066, August.
    20. Kasahara, Hiroyuki & Rodrigue, Joel, 2008. "Does the use of imported intermediates increase productivity? Plant-level evidence," Journal of Development Economics, Elsevier, vol. 87(1), pages 106-118, August.
    21. Paula Bustos, 2011. "Trade Liberalization, Exports, and Technology Upgrading: Evidence on the Impact of MERCOSUR on Argentinian Firms," American Economic Review, American Economic Association, vol. 101(1), pages 304-340, February.
    22. Atolia, Manoj, 2007. "Trade liberalization and rising wage inequality in Latin America: Reconciliation with HOS theory," Journal of International Economics, Elsevier, vol. 71(2), pages 467-494, April.
    23. Davis, Donald R. & Harrigan, James, 2011. "Good jobs, bad jobs, and trade liberalization," Journal of International Economics, Elsevier, vol. 84(1), pages 26-36, May.
    24. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
    25. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 317-341.
    26. Mary Amiti & Donald R. Davis, 2012. "Trade, Firms, and Wages: Theory and Evidence," Review of Economic Studies, Oxford University Press, vol. 79(1), pages 1-36.
    27. Pavcnik, Nina, 2003. "What explains skill upgrading in less developed countries?," Journal of Development Economics, Elsevier, vol. 71(2), pages 311-328, August.
    28. James E. Anderson & J. Peter Neary, 2005. "Measuring the Restrictiveness of International Trade Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262012200, January.
    29. Beyer, Harald & Rojas, Patricio & Vergara, Rodrigo, 1999. "Trade liberalization and wage inequality," Journal of Development Economics, Elsevier, vol. 59(1), pages 103-123, June.
    30. Francisco Gallego, 2006. "Skill Premium in Chile: Studying the Skill Bias Technical Change Hypothesis in the South," Working Papers Central Bank of Chile 363, Central Bank of Chile.
    31. Ederington, Josh & McCalman, Phillip, 2008. "Endogenous firm heterogeneity and the dynamics of trade liberalization," Journal of International Economics, Elsevier, vol. 74(2), pages 422-440, March.
    32. Ariel Burstein & Jonathan Vogel, 2017. "International Trade, Technology, and the Skill Premium," Journal of Political Economy, University of Chicago Press, vol. 125(5), pages 1356-1412.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:bla:worlde:v:40:y:2017:i:12:p:2676-2703 is not listed on IDEAS
    2. 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.

    More about this item

    Keywords

    Intra-industry trade; Firm heterogeneity in factor intensities; Wage inequal- ity; Overshooting; Impact versus long run effect; Chile;

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:brd:wpaper:52. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Leslie Yancich). General contact details of provider: http://edirc.repec.org/data/gsbraus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.