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Trade, Wages And Skill Accumulation In The Emerging Giants

  • Richard G. Harris

    (Department of Economics, Simon Fraser University)

  • Peter Robertson

    (UWA Business School, The University of Western Australia)

A pervasive result in the empirical “trade-wage” literature is that liberalization is associated with rising skill premiums in developing economies. Though this represents a puzzle in the context of static Heckscher-Ohlin models, the dynamic effects of trade liberalization have received little attention. To investigate these dynamic effects of trade-liberalization on the skill premium, we quantify the effect of unanticipated trade liberalization on the entire transition path of an economy, using China and India as examples. On impact trade liberalization is shown to generate large jumps in investment, education demand, and the skill premium. The path of the skill premium is also shown to be non-monotonic and changes sign over the transition. The results are shown to depend on Mincerian on-the job training costs and the degree of capital-skill complementarity. As well as providing an explanation for the skill-premium puzzle in developing economies, the results also show that trade liberalization in India and China is “pro-poor”, in that it generates strong wage growth for both skilled and unskilled labor.

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Paper provided by The University of Western Australia, Department of Economics in its series Economics Discussion / Working Papers with number 09-19.

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Length: 58 pages
Date of creation: 2009
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Handle: RePEc:uwa:wpaper:09-19
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