Skill acquisition and the dynamics of trade-induced inequality

Abstract

This paper quanti…es the impact of trade liberalization on wage inequality between workers of di¤erent skill levels and across age groups. I propose a model in which trade liberalization increases the demand for skill due to production share reallocation across …rms and technology switching. However, unlike in the existing literature, I endogenize the skill supply by supplementing the skill-demand side of the model with an overlapping-generations model of skill acquisition. I calibrate the model to 2007 US data and simulate the economy's transition path in response to the removal of policy trade barriers. Workers have rational expectations and, therefore, must take into account the general-equilibrium e¤ects on wages of changes in skill supply during the economy's transition. I …nd that the aggregate gains from trade liberalization, de…ned as the increase in discounted real earnings relative to their pre-liberalization level, are 5.9%. However, these gains are not distributed evenly among workers. For those alive at the time of implementation of the new trade policy, the oldest educated workers' discounted real lifetime earnings increase by 9.9%, while the oldest uneducated workers' discounted real lifetime earnings increase by only 1.5%. On the one hand, ignoring the economy's transition leads to an understatement of trade-induced inequality as this fails to account for transitory inequality. On the other hand, ignoring the endogeneity of the skill supply leads to an overstatement of trade-induced inequality as this fails to account for the equalizing e¤ect of the endogenous skill-supply adjustment.

Trade, educational costs, and skill acquisition

“…The theoretical results of our model are consistent with the empirical facts that job polarization also happens within industries (Goos et al, 2014). Several theoretical papers find similar results, as in Helpman, Itskhoki, and Redding (2010), Sampson (2014), Davidson, Heyman, Matusz, Sjöholm, and Zhu (2016, 2017, 2018, and Guner, Ruggieri, and Tybout (2018). The theoretical predictions in these models are supported by empirical evidence in Heyman (2016), Helpman, Itskhoki, Muendler, and Redding (2017).…”

The role of trade and offshoring in the determination of relative wages and child labour

“…An early contribution by Findlay and Kierzkowsky (1983) introduces endogenous skill acquisition in the HO model. The dynamic implications are investigated by Harris andRobertson (2013), andDanziger (2017) in a small open economy framework. Second, not all of the technology is there for the taking.…”

“…As far as we are aware, we are the …rst to do that. The endogenization of skilled and unskilled labour via education and child labour, and the introduction of a time dimension in the decision process, make our analysis akin to that of Danziger (2017). Like the latter, we aim to predict the e¤ects of trade liberalization.…”

Endogenous Comparative Advantage*

“…6 5 The focus of this body of literature is mainly to show how even if factor price equalization holds (for the marginal worker), trade induces different incentives to acquire human capital across countries. For recent extensions, see also Ranjan (2001), Falvey et al (2010), Auer (2015), Unel (2015), Blanchard and Willmann (2016), and Danziger (2017). In some cases, the exogenous country differences are assumed by analyzing the effects of trade on a small open economy that takes the world price as given, as in Cartiglia (1997), Bougheas et al (2011), Bonfatti and Ghatak (2013), and Harris and Robertson (2013).…”