International trade, technology, and the skill premium

What are the consequences of international trade on income inequality---measured as the relative wage of skilled to unskilled workers, the skill premium? To address this question we formulate a multi-country model of international trade that introduces skill intensity differences across firms and sectors and factor endowment differences across countries into an otherwise standard quantitative model of international trade. Parameterized for 65 countries using firm-, sector-, and aggregate-level data, our model can account for a number of features of the data including the relationship between firm size, exporter status, and skill intensity and the relationship between sector-level trade shares and skill intensities. Our model generates large increases in the skill premium in response to reductions in trade costs, especially in open countries and small countries, but not necessarily in those that are skill abundant. Using data generated by our model, we show that standard approaches in the literature underestimate the rise in the skill premium generated by trade cost reductions in almost all countries, especially in skill-scarce countries.