Working Paper: NBER ID: w16459
Authors: Ariel Burstein; Jonathan Vogel
Abstract: We construct a model of international trade and multinational production (MP) to examine the impact of globalization on the skill premium in skill-abundant and skill-scarce countries. The key mechanisms in our framework arise from the interaction between three elements: cross-country differences in factor endowments and sectoral productivities, technological heterogeneity across producers within sectors, and skill-biased technology. Reductions in trade and/or MP costs induce a reallocation of resources towards a country's comparative advantage sector (increasing the skill premium in skill-abundant countries and reducing it in skill-scarce countries) and within sectors towards more productive and skill-intensive producers (increasing the skill premium in all countries). \n \nWe parameterize the model to match salient features of the extent and composition of trade and MP between the U.S. and skill-abundant and skill-scarce countries in 2006. We show that a reduction in trade and MP costs, moving from autarky to 2006 levels of trade and MP, increases the skill premium by roughly 5% in skill-abundant and skill-scarce countries. We also show that the growth in US trade and MP between 1966 and 2006 accounts for 1/9th of the 24% rise in the US skill premium over this period. MP is at least as important as international trade in generating this rise in the skill premium.
Keywords: Globalization; Technology; Skill Premium; International Trade; Multinational Production
JEL Codes: F1; F11; F16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reductions in trade and MP costs (F19) | Reallocation of resources towards a country's comparative advantage sector (F16) |
| Reallocation of resources towards a country's comparative advantage sector (F16) | Increase in skill premium in skill-abundant countries (F66) |
| Reallocation of resources towards a country's comparative advantage sector (F16) | Decrease in skill premium in skill-scarce countries (F66) |
| Decline in trade costs (F19) | Increase in relative demand for skill within sectors (J24) |
| Growth in U.S. trade and MP between 1966 and 2006 (F10) | 19% of the 24% rise in the U.S. skill premium (F66) |
| Rise in skill premium (J24) | Greater in skill-scarce countries due to stronger within effect compared to between effect (J24) |