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Skill Biased Heterogeneous Firms, Trade Liberalization, and the Skill Premium

  • James Harrigan
  • Ariell Reshef

We propose a theory that rising globalization and rising wage inequality are related because trade liberalization raises the demand facing highly competitive skill-intensive firms. In our model, only the lowest-cost firms participate in the global economy exactly along the lines of Melitz (2003). In addition to differing in their productivity, firms differ in their skill intensity. We model skill-biased technology as a correlation between skill intensity and technological acumen, and we estimate this correlation to be large using firm-level data from Chile in 1995. A fall in trade costs leads to both greater trade volumes and an increase in the relative demand for skill, as the lowest-cost/most-skilled firms expand to serve the export market while less skill-intensive non-exporters retrench in the face of increased import competition. This mechanism works regardless of factor endowment differences, so we provide an explanation for why globalization and wage inequality move together in both skill-abundant and skill-scarce countries. In our model countries are net exporters of the services of their abundant factor, but there are no Stolper- Samuelson effects because import competition affects all domestic firms equally.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17604.

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Date of creation: Nov 2011
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Publication status: published as “Skill biased heterogeneous firms, trade liberalization, and the skill premium”, 2014, forthcoming Canadian Journal of Economics. Joint with Ariell Reshef.
Handle: RePEc:nbr:nberwo:17604
Note: ITI LS
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  1. 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.
  2. Richard Baldwin & James Harrigan, 2007. "Zeros, Quality and Space: Trade Theory and Trade Evidence," NBER Working Papers 13214, National Bureau of Economic Research, Inc.
  3. Eric Verhoogen, 2007. "Trade, quality upgrading and wage inequality in the Mexican manufacturing sector," Discussion Papers 0607-08, Columbia University, Department of Economics.
  4. Kugler, M., Verhoogen, E.A., 2008. "Product Quality at the Plant Level: Plant Size, Exports, Output Prices and Input Prices in Colombia," Working Papers eg0058, Wilfrid Laurier University, Department of Economics, revised Feb 2008.
  5. David H. Autor & Frank Levy & Richard J. Murnane, 2001. "The Skill Content of Recent Technological Change: An Empirical Exploration," NBER Working Papers 8337, National Bureau of Economic Research, Inc.
  6. Chong Xiang, 2005. "New Goods and the Relative Demand for Skilled Labor," The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 285-298, May.
  7. Daron Acemoglu, 2001. "Directed Technical Change," NBER Working Papers 8287, National Bureau of Economic Research, Inc.
  8. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  9. Paula Bustos, 2005. "The impact of trade liberalization on skill upgrading. Evidence from Argentina," Economics Working Papers 1189, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2011.
  10. Zhu, Susan Chun & Trefler, Daniel, 2005. "Trade and inequality in developing countries: a general equilibrium analysis," Journal of International Economics, Elsevier, vol. 65(1), pages 21-48, January.
  11. Steven Stern, 1997. "Simulation-Based Estimation," Journal of Economic Literature, American Economic Association, vol. 35(4), pages 2006-2039, December.
  12. Bernard, A.B. & Jensen, J.B., 1994. "Exporters, Skill Upgrading, and the Wage Gap," Working papers 94-30, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Ariel Burstein & Jonathan Vogel, 2010. "Globalization, Technology, and the Skill Premium: A Quantitative Analysis," NBER Working Papers 16459, National Bureau of Economic Research, Inc.
  14. John Romalis, 2004. "Factor Proportions and the Structure of Commodity Trade," American Economic Review, American Economic Association, vol. 94(1), pages 67-97, March.
  15. repec:sae:ecolab:v:16:y:2006:i:2:p:1-2 is not listed on IDEAS
  16. 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.
  17. David H. Autor & Lawrence F. Katz & Melissa S. Kearney, 2008. "Trends in U.S. Wage Inequality: Revising the Revisionists," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 300-323, May.
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