Trade and the Skill Premium Puzzle with Capital Market Imperfections
An interesting puzzle is that 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 contrast with neoclassical theory, according to which trade should increase the relative return of the relatively abundant factor. We develop a simple model of trade with capital market imperfections, and show that trade can increase the skill premium in both the North and the South, and both in the short run as well as in the long run. We show that trade with a skill-intensive economy has two effects: it reduces the skilled wage, and thus discourages non talented agents out of the skilled labor force; and it reduces the cost of subsistence, thus allowing the talented offspring of unskilled workers to go to school. This compositional effect has a positive effect on the observed skill premium, possibly strong enough to counterweight the decrease in the skilled wage.
|Date of creation:||Mar 2011|
|Date of revision:|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kenneth Kletzer and Pranab Bardhan., 1986.
"Credit Markets and Patterns of International Trade,"
Economics Working Papers
8612, University of California at Berkeley.
- Kletzer, Kenneth & Bardhan, Pranab, 1987. "Credit markets and patterns of international trade," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 57-70, October.
- Kletzer, Kenneth & Bardhan, Pranab, 1986. "Credit Markets and Patterns of International Trade," Department of Economics, Working Paper Series qt1g36f3sd, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Tatyana Chesnokova & Kala Krishna, 2006.
"Skill Acquisition, Credit Constraints, and Trade,"
NBER Working Papers
12411, National Bureau of Economic Research, Inc.
- Ranjan, P., 1999.
""Credit Constraints and the Phenomenon of Child Labor","
98-99-12, California Irvine - School of Social Sciences.
- Ranjan, Priya, 2001. "Credit constraints and the phenomenon of child labor," Journal of Development Economics, Elsevier, vol. 64(1), pages 81-102, February.
- Ranjan, Priya, 2001. "Dynamic evolution of income distribution and credit-constrained human capital investment in open economies," Journal of International Economics, Elsevier, vol. 55(2), pages 329-358, December.
- Wacziarg, Romain & Wallack, Jessica Seddon, 2004.
"Trade liberalization and intersectoral labor movements,"
Journal of International Economics,
Elsevier, vol. 64(2), pages 411-439, December.
- Wacziarg, Romain & Seddon, Jessica, 2000. "Trade Liberalization and Intersectoral Labor Movements," Research Papers 1652, Stanford University, Graduate School of Business.
- Attanasio, Orazio & Goldberg, Pinelopi & Pavcnik, Nina, 2003.
"Trade Reforms and Wage Inequality in Colombia,"
CEPR Discussion Papers
4023, C.E.P.R. Discussion Papers.
- 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.
- Naércio Aquino Menezes-Filho & Marc-Andreas Muendler, 2011.
"Labor Reallocation in Response to Trade Reform,"
NBER Working Papers
17372, National Bureau of Economic Research, Inc.
- Naércio Aquino Menezes Filho & Marc-Andreas Muendler, 2007. "Labor Reallocation in Response to Trade Reform," CESifo Working Paper Series 1936, CESifo Group Munich.
- Muendler, Marc-Andreas, 2007. "Labor Reallocation in Response to Trade Reform," University of California at San Diego, Economics Working Paper Series qt3cm38535, Department of Economics, UC San Diego.
- Nancy L. Stokey, 1991. "Human Capital, Product Quality, and Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 587-616.
- Ranjan, Priya, 2003. "Trade induced convergence through human capital accumulation in credit-constrained economies," Journal of Development Economics, Elsevier, vol. 72(1), pages 139-162, October.
- Das, Satya P., 2006. "Trade, skill acquisition and distribution," Journal of Development Economics, Elsevier, vol. 81(1), pages 118-141, October.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:8286. 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: ()The email address of this maintainer does not seem to be valid anymore. Please ask to update the entry or send us the correct email address
If references are entirely missing, you can add them using this form.