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Trade-Induced Structural Change and the Skill Premium

Author

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  • Sebastian Sotelo

    (The University of Michigan, Ann Arbor)

  • Javier Cravino

    (University of Michigan)

Abstract

This paper proposes and quantifies a novel mechanism through which trade integration can affect the skill premium. When complementarities across sectors are strong, trade integration in low-skilled intensive sectors reduces the employment share of these sectors and rises the skill premium. We document that, in a broad set of countries over the past three decades, the share of domestically produced goods in absorption has declined dramatically in low-skill labor intensive sectors and remained roughly constant in high-skill labor intensive sectors. Using a quantitative multi-country, multi-sector model of trade and labor heterogeneity, we show that these changes in trade patterns account for roughly half of the decline in the share of goods-producing sectors in gross output. In our baseline calibration, this generates a 4 percent increase in the skill premium in the average country of our sample, as well as in the US. The increase in the skill premium is much larger in developing countries where the highly traded sectors are particularly unskilled-intensive.

Suggested Citation

  • Sebastian Sotelo & Javier Cravino, 2016. "Trade-Induced Structural Change and the Skill Premium," 2016 Meeting Papers 1690, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:1690
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    References listed on IDEAS

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    1. Keith Head & John Ries, 2001. "Increasing Returns versus National Product Differentiation as an Explanation for the Pattern of U.S.-Canada Trade," American Economic Review, American Economic Association, vol. 91(4), pages 858-876, September.
    2. Kiminori Matsuyama, 2009. "Structural Change in an Interdependent World: A Global View of Manufacturing Decline," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 478-486, 04-05.
    3. Uy, Timothy & Yi, Kei-Mu & Zhang, Jing, 2013. "Structural change in an open economy," Journal of Monetary Economics, Elsevier, vol. 60(6), pages 667-682.
    4. Timothy J. Kehoe & Kim J. Ruhl & Joseph B. Steinberg, 2018. "Global Imbalances and Structural Change in the United States," Journal of Political Economy, University of Chicago Press, vol. 126(2), pages 761-796.
    5. Justin Caron & Thibault Fally & James R. Markusen, 2014. "International Trade Puzzles: A Solution Linking Production and Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 129(3), pages 1501-1552.
    6. Ariel Burstein & Javier Cravino & Jonathan Vogel, 2013. "Importing Skill-Biased Technology," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(2), pages 32-71, April.
    7. Basco, Sergi & Mestieri, Martí, 2013. "Heterogeneous trade costs and wage inequality: A model of two globalizations," Journal of International Economics, Elsevier, vol. 89(2), pages 393-406.
    8. Deardorff, Alan V. & Staiger, Robert W., 1988. "An interpretation of the factor content of trade," Journal of International Economics, Elsevier, vol. 24(1-2), pages 93-107, February.
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    Cited by:

    1. repec:eee:inecon:v:108:y:2017:i:c:p:387-412 is not listed on IDEAS
    2. Antràs, Pol & de Gortari, Alonso & Itskhoki, Oleg, 2017. "Globalization, inequality and welfare," Journal of International Economics, Elsevier, vol. 108(C), pages 387-412.
    3. Ricardo Reyes-Heroles, 2018. "Globalization and Structural Change in the United States: A Quantitative Assessment," 2018 Meeting Papers 1027, Society for Economic Dynamics.
    4. Logan T. Lewis & Ryan Monarch & Michael J. Sposi & Jing Zhang, 2018. "Structural Change and Global Trade," International Finance Discussion Papers 1225, Board of Governors of the Federal Reserve System (U.S.).
    5. Lidia Smitkova, 2018. "Does Openness Matter for Structural Change?," 2018 Meeting Papers 257, Society for Economic Dynamics.
    6. Rodrigo Adão & Costas Arkolakis & Federico Espósito, 2019. "Spatial Linkages, Global Shocks, and Local Labor Markets: Theory and Evidence," Cowles Foundation Discussion Papers 2163, Cowles Foundation for Research in Economics, Yale University.

    More about this item

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • F63 - International Economics - - Economic Impacts of Globalization - - - Economic Development

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