Working Paper: CEPR ID: DP10691
Authors: Raphael Auer
Abstract: This paper examines the cross-country income and welfare consequences of trade-induced human capital (dis-)accumulation. The model is based on heterogeneous workers who make educational decisions in the presence of complete markets. When such heterogeneous workers invest in schooling, high type agents earn a surplus from their investment. In the presence of cross-country differences in skill-augmenting technology, trade shifts this surplus to rich countries that can use skills more efficiently. Thus, while the static gains from trade may lead to convergence, the dynamic gains from trade occur to initially rich countries, thus leading to cross-country divergence of income and welfare. The second part of the paper endogenizes world prices, documenting that as trade liberalization concentrates skills in countries with a high level of skill augmenting technology, it thereby increases the effective global supply of skilled labor. Despite the resulting decline in the price of skill-intensive goods, trade is shown to be skill-biased.
Keywords: economic growth; employment; factor content of trade; human capital; import competition
JEL Codes: E24; F11; F14; F16; J24; O11; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade-induced human capital disaccumulation (F16) | Divergence in income and welfare across countries (F62) |
| Educational investments shift towards rich countries (I25) | Rich countries benefit disproportionately from trade liberalization (F14) |
| Higher skill premium in rich countries (J24) | More workers pursue education (J24) |
| More workers pursue education (J24) | Increase in lifetime incomes in rich countries (F62) |
| Lower skill premiums in poorer countries (F66) | Decline in educational investments in poorer countries (H52) |
| Decline in educational investments in poorer countries (H52) | Stagnation or decline in relative welfare in poorer countries (O57) |
| Trade liberalization (F13) | Increase in effective global supply of skilled labor (F66) |
| Trade reallocates human capital (J24) | Amplification of existing disparities in welfare across nations (F63) |