Long-term impact of trade liberalization on human capital formation

Abstract

While a growing line of research has assessed the effect of trade liberalization on human capital formation, most of these studies focus on its short-term effect on individual’s school attendance. Much less is known about its long-run effect, as well as the impact on other aspects of human capital formation such as labor market and noncognitive outcomes. This paper studies the impact of trade liberalization on individuals’ long-term human capital accumulation, including school attendance, cognitive abilities, labor market performance, and noncognitive outcomes. By constructing prefecture-year-level tariff barriers, our identification strategy exploits variations in different cohorts’ exposure to a trade shock at age 16 for individuals within the same prefecture. Empirical results suggest that trade liberalization leads to decreased completed years of schooling, cognitive abilities, wage, and noncognitive outcomes. We provide suggestive evidence that this observed pattern is explained by the expansion of job opportunities in relatively low-skilled and labor-intensive sectors.