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New Goods and Rising Skill Premium: A Theoretical Investigation

Listed author(s):
  • Chong Xiang

    (University of Michigan)

This paper examines the effects of new goods on the relative wages of skilled-labor and trade patterns in a two-cone Heckscher-Ohlin model and shows that: (i) new goods can be a valid theoretical explanation for the rising skill premium in the U.S. (ii) new goods have both domestic and international factor market effects, and their interplay determines the outcome and gives rise to surprising results; (iii) new goods that are “friendly” to the abundant (scarce) factors move the relative factor prices in the direction of convergence (divergence). The setup is general in the goods dimension so that the introduction of new goods is completely unrestricted, and the results apply to any one or any combination of the relative demand shocks for skilled labor. The results also apply when non-tradable goods are present.

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Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 478.

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Length: 42 Pages
Date of creation: 2002
Handle: RePEc:mie:wpaper:478
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