Working Paper: CEPR ID: DP2677
Authors: Karolina Ekholm; Karen Helene Midelfart Knarvik
Abstract: We develop a model where trade liberalization leads to skill-biased technological change, which in turn raises the relative return to skilled labour. As firms get access to a larger market, they have incentives to choose a more skill-intensive technology because a lowering of variable costs requires additional use of skilled labour. This way, we establish a link between trade, technology and relative returns to skilled and unskilled labour. Moreover, we show that as market integration continues and trade costs fall below a certain threshold, the relative return to skilled labour may fall.
Keywords: Imperfect competition; Technology; Trade; Trade liberalization; Wages
JEL Codes: F02; F12; J31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade Liberalization (F13) | Skill-Biased Technological Change (J24) |
| Skill-Biased Technological Change (J24) | Relative Return to Skilled Labor (J24) |
| Trade Liberalization (F13) | Relative Return to Skilled Labor (J24) |
| Trade Costs (F19) | Technology Choice (O14) |
| Decrease in Trade Costs (F19) | Relative Return to Skilled Labor (J24) |
| Output Expansion (Y60) | Demand for Unskilled Labor (F66) |
| Demand for Unskilled Labor (F66) | Relative Demand for Skilled Labor (J29) |