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

Abstract

This paper studies the labor market impacts of trade liberalization, and specifically tariff reductions, with a focus on the wage gap between skilled and unskilled workers in presence of vertical linkages in the fixed costs of production. To that purpose, we develop and empirically test a monopolistic competition model with variable elasticity of substitution and labor differentiated by skill level, where skilled workers are the residual claimants of savings on imported inputs. Consistently with the model predictions, we find that a 10% reduction in tariffs implies on average a 3.8% increase in the wage gap. In addition, the same level of tariff reduction is expected to lower unskilled employment in domestic production by 3.3%, which is partially offset by an expansion of unskilled employment in the export segment of production. These results are obtained matching detailed international trade data with World Input-Output Tables and EU KLEMS data on country-sector wage by skill level on 17 OECD countries from 1996 to 2005.The original version of this article was revised: In the original publication of the article, the sign ''\'' has been converted into latex code 'lt0' and the sign ''['' has been missed in one of the equations. The equation has been corrected in this article.

Trade, skill premium and the gender wage gap: Evidence from manufacturing industries

“…Our preferred speci cation is column 4 because its ability to capture endogenous variables. Previous studies have highlighted the strengths of this estimation (see Amiti & Cameron, 2012;Di Comite., Nocco, & Ore ce, 2018).…”

Trade liberalisation and the wage premium: evidence from Thai manufacturing

“…In some studies, the gap widened (Davis and Mishra, 2007;Goldberg and Pavcnik, 2007). Earlier explanations of the wage premium's persistence emphasised friction in the labour 2 See for example, Revenga (1997), Hanson andHarrison (1999), Feliciano (2001), Attanasia et al (2004), Currie and Harrison (1997), Topalova (2004), Robertson (2000Robertson ( , 2004 and Wacziarg and Wallack (2004); Amiti and Konings (2007); Topalova and Khandelwal (2011);Di Comite et al (2018); Lechthaler and Mileva (2019); Hahn and Choi (2022).…”

The direct and indirect impacts of liberal immigration policies on the United States’ economy

“…8 Structural changes in the labor market after trade liberalization not only decreases fixed costs of production but also increases the productivity of goods, which leads to increased wage premiums for skilled labor relative to unskilled labor due to the increase in profits (Arbache et al, 2004;Comite et al, 2018). Many studies have also shown that a reduction in trade barriers increases the relative demand for skilled labor by reallocating factors toward more skillintensive firms (Burstein and Vogel, 2017;Feenstra and Hanson, 1997).…”