IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/8999.html
   My bibliography  Save this paper

Skill Premium and Trade Puzzles: A Solution Linking Production and Preferences

Author

Listed:
  • Caron, Justin
  • Fally, Thibault
  • Markusen, James R.

Abstract

International trade theory is a general-equilibrium discipline, yet most of the standard portfolio of research focuses on the production side of general equilibrium. In addition, we do not have a good understanding of the relationship between characteristics of goods in production and characteristics of preferences. This paper conducts an empirical investigation into the relationship between a good's factor intensity in production and its income elasticity of demand in consumption. In particular, we find a strong and significant positive relationship between skilled-labor intensity in production and income elasticity of demand for several types of preferences, with and without accounting for trade costs and differences in prices. Counter-factual simulations yield a number of results. We can explain about half of “missing trade”, and show an important role for per-capita income in understanding trade/GDP ratios, the choice of trading partners, and the composition of trade. Furthermore, an equal rise in productivity in all sectors in all countries leads to a rising skill premium in all countries, with particularly large increases in developing countries.

Suggested Citation

  • Caron, Justin & Fally, Thibault & Markusen, James R., 2012. "Skill Premium and Trade Puzzles: A Solution Linking Production and Preferences," CEPR Discussion Papers 8999, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8999
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=8999
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Chao, Hung-po & Kim, Sehun & Manne, Alan S., 1982. "Computation of equilibria for nonlinear economies: Two experimental models," Journal of Policy Modeling, Elsevier, vol. 4(1), pages 23-43, March.
    2. Robert C. Feenstra & Gordon H. Hanson, 1999. "The Impact of Outsourcing and High-Technology Capital on Wages: Estimates For the United States, 1979–1990," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 907-940.
    3. Simonovska, Ina & Waugh, Michael E., 2014. "The elasticity of trade: Estimates and evidence," Journal of International Economics, Elsevier, vol. 92(1), pages 34-50.
    4. 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.
    5. Fally, Thibault & Paillacar, Rodrigo & Terra, Cristina, 2010. "Economic geography and wages in Brazil: Evidence from micro-data," Journal of Development Economics, Elsevier, vol. 91(1), pages 155-168, January.
    6. Ina Simonovska, 2015. "Income Differences and Prices of Tradables: Insights from an Online Retailer," Review of Economic Studies, Oxford University Press, vol. 82(4), pages 1612-1656.
    7. Inmaculada Martínez-Zarzoso & Sebastian Vollmer, 2016. "Bilateral Trade Flows and Income Distribution Similarity," PLOS ONE, Public Library of Science, vol. 11(5), pages 1-12, May.
    8. Kiminori Matsuyama, 2000. "A Ricardian Model with a Continuum of Goods under Nonhomothetic Preferences: Demand Complementarities, Income Distribution, and North-South Trade," Journal of Political Economy, University of Chicago Press, vol. 108(6), pages 1093-1120, December.
    9. James R. Markusen, 2021. "Putting per-capita income back into trade theory," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 10, pages 187-197, World Scientific Publishing Co. Pte. Ltd..
    10. Simonovska, Ina & Waugh, Michael E., 2014. "The elasticity of trade: Estimates and evidence," Journal of International Economics, Elsevier, vol. 92(1), pages 34-50.
    11. James R. Markusen, 2021. "Explaining the Volume of Trade: An Eclectic Approach," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 9, pages 177-186, World Scientific Publishing Co. Pte. Ltd..
    12. Trefler, Daniel, 1995. "The Case of the Missing Trade and Other Mysteries," American Economic Review, American Economic Association, vol. 85(5), pages 1029-1046, December.
    13. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, July.
    14. Ina Simonovska, 2009. "Income Differences and Prices of Tradables," 2009 Meeting Papers 692, Society for Economic Dynamics.
    15. Hanoch, Giora, 1975. "Production and Demand Models with Direct or Indirect Implicit Additivity," Econometrica, Econometric Society, vol. 43(3), pages 395-419, May.
    16. Jeffrey J. Reimer & Thomas W. Hertel, 2010. "Nonhomothetic Preferences and International Trade," Review of International Economics, Wiley Blackwell, vol. 18(2), pages 408-425, May.
    17. James Cassing & Shuichiro Nishioka, 2009. "Nonhomothetic Tastes and Missing Trade of Factor Services," Working Papers 09-03, Department of Economics, West Virginia University.
    18. Hunter, Linda, 1991. "The contribution of nonhomothetic preferences to trade," Journal of International Economics, Elsevier, vol. 30(3-4), pages 345-358, May.
    19. Cragg, Michael Ian & Epelbaum, Mario, 1996. "Why has wage dispersion grown in Mexico? Is it the incidence of reforms or the growing demand for skills?," Journal of Development Economics, Elsevier, vol. 51(1), pages 99-116, October.
    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. Ariu, Andrea, 2016. "Crisis-proof services: Why trade in services did not suffer during the 2008–2009 collapse," Journal of International Economics, Elsevier, vol. 98(C), pages 138-149.
    2. Markusen, James R., 2012. "Per-Capita Income as a Determinant of International Trade and Environmental Policies," Discussion Papers 2013-06, Graduate School of Economics, Hitotsubashi University.
    3. James R. Markusen, 2014. "Per-Capital Income as a Determinant of International Trade and Environment Policies," CESifo Working Paper Series 4618, CESifo.
    4. Pablo D. Fajgelbaum & Amit K. Khandelwal, 2016. "Measuring the Unequal Gains from Trade," The Quarterly Journal of Economics, Oxford University Press, vol. 131(3), pages 1113-1180.
    5. David Atkin & Benjamin Faber & Marco Gonzalez-Navarro, 2018. "Retail Globalization and Household Welfare: Evidence from Mexico," Journal of Political Economy, University of Chicago Press, vol. 126(1), pages 1-73.
    6. Justin Caron & Thibault Fally & James Markusen, 2021. "Per capita income and the demand for skills," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 12, pages 251-268, World Scientific Publishing Co. Pte. Ltd..
    7. James R. Markusen, 2021. "Putting per-capita income back into trade theory," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 10, pages 187-197, World Scientific Publishing Co. Pte. Ltd..
    8. Claudia Bernasconi, 2013. "Similarity of income distributions and the extensive and intensive margin of bilateral trade flows," ECON - Working Papers 115, Department of Economics - University of Zurich.
    9. Peter Egger & Michael Pfaffermayr, 2016. "A generalized spatial error components model for gravity equations," Empirical Economics, Springer, vol. 50(1), pages 177-195, February.
    10. Peter Egger & Michael Pfaffermayr, 2016. "A generalized spatial error components model for gravity equations," Empirical Economics, Springer, vol. 50(1), pages 177-195, February.
    11. Daniela MAGGIONI & Alessia LO TURCO & Mauro GALLEGATI, 2014. "Does export complexity matter for firms' output volatility?," Working Papers 407, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. James R. Markusen, 2021. "Putting per-capita income back into trade theory," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 10, pages 187-197, World Scientific Publishing Co. Pte. Ltd..
    2. Justin Caron & Thibault Fally & James Markusen, 2021. "Per capita income and the demand for skills," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 12, pages 251-268, World Scientific Publishing Co. Pte. Ltd..
    3. Christian Hepenstrick & Alexander Tarasov, 2015. "Per capita income and the extensive margin of bilateral trade," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 48(4), pages 1561-1599, November.
    4. Claudia Bernasconi, 2013. "Similarity of income distributions and the extensive and intensive margin of bilateral trade flows," ECON - Working Papers 115, Department of Economics - University of Zurich.
    5. Reto Foellmi & Christian Hepenstrick & Josef Zweimüller, 2010. "Non-homothetic preferences, parallel imports and the extensive margin of international trade," Diskussionsschriften dp1009, Universitaet Bern, Departement Volkswirtschaft.
    6. Chung, Kim-Sau & Lu, Chia-Hui, 2014. "Non-homothetic preferences and IPRs protection," Journal of Development Economics, Elsevier, vol. 109(C), pages 229-239.
    7. Inmaculada Martínez-Zarzoso & Sebastian Vollmer, 2016. "Bilateral Trade Flows and Income Distribution Similarity," PLOS ONE, Public Library of Science, vol. 11(5), pages 1-12, May.
    8. Joachim Stibora & Albert de Vaal, 2015. "Does Preferential Trade Benefit Poor Countries? A General Equilibrium Assessment with Nonhomothetic Preferences," Review of International Economics, Wiley Blackwell, vol. 23(2), pages 239-270, May.
    9. Lionel Fontagné & Sophie Hatte, 2013. "European High-End Products in International Competition," PSE - G-MOND WORKING PAPERS hal-00959394, HAL.
    10. Kiminori Matsuyama, 2019. "Engel's Law in the Global Economy: Demand‐Induced Patterns of Structural Change, Innovation, and Trade," Econometrica, Econometric Society, vol. 87(2), pages 497-528, March.
    11. Monika Mr?zov? & J. Peter Neary, 2014. "Together at Last: Trade Costs, Demand Structure, and Welfare," American Economic Review, American Economic Association, vol. 104(5), pages 298-303, May.
    12. Tarasov, Alexander, 2012. "Per capita income, market access costs, and trade volumes," Journal of International Economics, Elsevier, vol. 86(2), pages 284-294.
    13. Foellmi, Reto & Hanslin Grossmann, Sandra & Kohler, Andreas, 2018. "A dynamic North-South model of demand-induced product cycles," Journal of International Economics, Elsevier, vol. 110(C), pages 63-86.
    14. Reto Foellmi & Christian Hepenstrick & Zweimüller Josef, 2018. "International Arbitrage and the Extensive Margin of Trade between Rich and Poor Countries," Review of Economic Studies, Oxford University Press, vol. 85(1), pages 475-510.
    15. James Cassing & Shuichiro Nishioka, 2015. "Per Capita Income and the Mystery of Missing Trade," Review of International Economics, Wiley Blackwell, vol. 23(3), pages 606-619, August.
    16. Matsuyama, Kiminori, 2015. "The home market effect and patterns of trade between rich and poor countries," LSE Research Online Documents on Economics 86292, London School of Economics and Political Science, LSE Library.
    17. Sposi, Michael, 2015. "Trade barriers and the relative price of tradables," Journal of International Economics, Elsevier, vol. 96(2), pages 398-411.
    18. Devashish Mitra & Vitor Trindade, 2005. "Inequality and trade," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 38(4), pages 1253-1271, November.
    19. Brooks, Eileen L., 2006. "Why don't firms export more? Product quality and Colombian plants," Journal of Development Economics, Elsevier, vol. 80(1), pages 160-178, June.
    20. KANO Kazuko & KANO Takashi & TAKECHI Kazutaka, 2015. "The Price of Distance: Pricing to market, producer heterogeneity, and geographic barriers," Discussion papers 15017, Research Institute of Economy, Trade and Industry (RIETI).

    More about this item

    Keywords

    gravity; income; missing trade; non-homothetic preferences; skill premium;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

    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:cpr:ceprdp:8999. 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: . General contact details of provider: https://www.cepr.org .

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://www.cepr.org .

    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.