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Escaping the Losses from Trade: The Impact of Heterogeneity on Skill Acquisition

Author

Listed:
  • Axelle Ferriere

    (European University Institute)

  • Gaston Navarro

    (Federal Reserve Board)

  • Ricardo Reyes-Heroles

    (Federal Reserve Board)

Abstract

While trade openness generates aggregate welfare gains, it can have unequal effects on the wage of skilled relative to unskilled workers. In this paper, we ask how heterogeneous the welfare gains of trade openness can be in the short and the long-run. To do so, we build a dynamic heterogeneous-household life-cycle model of international trade with incomplete credit markets. The model incorporates an endogenous costly skill acquisition, which allows unskilled workers to invest in education and escape the short-run losses of trade openness. We calibrate the model to match trends in trade openness in the United States between the late 1980s and 2010. We find that poor households take the longest to acquire skills and are therefore the last to experience positive gains from trade openness, which in some cases may not realize within a life-time. We also argue that welfare for all workers increases in the long-run, and that physical capital accumulation is essential for this result.

Suggested Citation

  • Axelle Ferriere & Gaston Navarro & Ricardo Reyes-Heroles, 2018. "Escaping the Losses from Trade: The Impact of Heterogeneity on Skill Acquisition," 2018 Meeting Papers 1248, Society for Economic Dynamics.
  • Handle: RePEc:red:sed018:1248
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    References listed on IDEAS

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    1. Brant Abbott & Giovanni Gallipoli & Costas Meghir & Giovanni L. Violante, 2019. "Education Policy and Intergenerational Transfers in Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 127(6), pages 2569-2624.
    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. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
    4. Maximiliano Dvorkin & Fernando Parro & Lorenzo Caliendo, 2015. "The Impact of Trade on Labor Market Dynamics," 2015 Meeting Papers 1532, Society for Economic Dynamics.
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    Cited by:

    1. Carroll, Daniel R. & Hur, Sewon, 2020. "On the heterogeneous welfare gains and losses from trade," Journal of Monetary Economics, Elsevier, vol. 109(C), pages 1-16.
    2. Lyon, Spencer G. & Waugh, Michael E., 2018. "Redistributing the gains from trade through progressive taxation," Journal of International Economics, Elsevier, vol. 115(C), pages 185-202.
    3. Gu, Grace & Malik, Samreen & Pozzoli, Dario & Rocha, Vera, 2021. "Chinese Import Competition, Offshoring and Servitization," Working Papers 5-2021, Copenhagen Business School, Department of Economics.
    4. Daniel R. Carroll & Sewon Hur, 2020. "On the Distributional Effects of International Tariffs," Working Papers 202018, Federal Reserve Bank of Cleveland.

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