Are Imports from Rich Nations Deskilling Emerging Economies? - Human Capital and the Dynamic Effects of Trade

This paper starts by documenting that during the last decades, the human capital embodied in imports from skill abundant nations has noticeably reduced skill accumulation in the less developed world. To identify the causal relation between these variables, the analysis utilizes over-time variation in the supply of skilled labor and the extent to which this variation affects the skill content of trade given the bilateral distance between im- and exporter. In a panel estimation covering 41 non-OCED members, a one standard deviation higher geographic pressure to import human capital is associated with a 12% reduction in the national average length of schooling. The paper next develops a model to analyze the income and welfare consequences of such trade-induced human capital disaccumulation. The model is based on heterogeneous workers who make educational decisions in the presence of complete markets. When heterogeneous workers invest in schooling, high type agents earn a surplus from their investment. Trade shifts this surplus to rich countries that can use skills more efficiently. Consequently, the dynamic effects of liberalization tend to occur to initially rich countries, thus leading to divergence.