Skill‐biased heterogeneous firms, trade liberalization and the skill premium

Abstract

We propose a theory that rising globalization and rising wage inequality are related because trade liberalization raises the demand facing highly competitive skill‐intensive firms. In our model, only the lowest‐cost firms participate in the global economy exactly along the lines of Melitz. In addition to differing in their productivity, firms differ in their skill intensity. We model skill‐biased technology as a correlation between skill intensity and technological acumen, and we estimate this correlation to be large using firm‐level data from Chile in 1995. A fall in trade costs leads to both greater trade volumes and an increase in the relative demand for skill, as the lowest‐cost/most‐skilled firms expand to serve the export market while less skill‐intensive non‐exporters retrench in the face of increased import competition. This mechanism works regardless of factor endowment differences, so we provide an explanation for why globalization and wage inequality move together in both skill‐abundant and skill‐scarce countries. In our model countries are net exporters of the services of their abundant factor, but there are no Stolper‐Samuelson effects because import competition affects all domestic firms equally.

Selection into Trade and Wage Inequality

“…The paper is also related to recent work analyzing the effect of trade on the returns to worker observables by Burstein and Vogel (2010), Bustos (2011b), Reshef (2011), andMonte (2011). Burstein and Vogel (2010) modify Eaton and Kortum (2002) to include skilled and unskilled labor and skill-biased technology, while Bustos (2011b) and Harrigan and Reshef (2011) introduce skilled and unskilled labor into the Melitz (2003) model.…”

“…Burstein and Vogel (2010) modify Eaton and Kortum (2002) to include skilled and unskilled labor and skill-biased technology, while Bustos (2011b) and Harrigan and Reshef (2011) introduce skilled and unskilled labor into the Melitz (2003) model. Since these papers only include two types of labor, they do not allow for inequality within groups of workers with similar skill levels, or for inequality to evolve differently in the upper and lower tails of the skill distribution.…”

Globalisation and wage inequality

“…It was documented for the United States by Bernard et al (2007), for Mexico by Verhoogen (2008), and for Chile by Harrigan and Reshef (2015). In combination with selection into exporting this feature generates an increase in the relative demand for skilled workers within sectors in response to trade liberalisation.…”

Trade liberalization and the wage gap: the role of vertical linkages and fixed costs

“…Second, it drives out of the market the unproductive firms, who release relatively more unskilled labor. Similarly, Harrigan and Reshef (2015) assume a positive relationship between firm-level skill intensity and productivity. However, the model they develop differs from that by Vannoorenberghe (2011) as they assume explicitly free entry of firms and consider two countries that can differ in their relative factor endowments in order to explain why globalization and wage inequality move together in both skill-abundant (North) and skill-scarce (South) countries.…”