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Trade liberalisation, skill-biased technical change and wages in developing countries: a model with heterogeneous firms

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  • Mauro Caselli

Abstract

This paper analyses the effects of trade liberalisation and technical change on real and relative wages. It builds a model with monopolistic competition, heterogeneous firms and two countries, North and South, and solves it numerically. Skill-biased technical change, caused by decreases in the price of imported equipment as a result of reduced trade costs or falls in its world price, tends to increase the relative wages of skilled workers. This increase in the skill premium can occur even in skill-scarce developing countries, as has often been observed in reality, even though Stolper-Samuelson effects pull the other way. What drives the rise in skilled wages when imported equipment becomes cheaper is the rise in demand for skilled workers in the most productive firms in each sector. Whether or not real unskilled wages increase absolutely after trade liberalisation appears to depend on whether trade costs are ad valorem or per-unit.

Suggested Citation

  • Mauro Caselli, 2010. "Trade liberalisation, skill-biased technical change and wages in developing countries: a model with heterogeneous firms," CSAE Working Paper Series 2010-27, Centre for the Study of African Economies, University of Oxford.
    • Handle: RePEc:csa:wpaper:2010-27
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    More about this item

    Keywords

    trade liberalisation; skill-biased technical change; wage inequality; real wages; equipment-skill complementarity;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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