New Goods and the Skill Premium

Abstract

In a two-cone Heckscher-Ohlin model with CES preferences and a continuum of goods, adding new goods to the North's technology necessarily increases the Northern skill premium if the new goods are skilled-labor intensive, but may even increase the premium if they are unskilled-labor intensive. Thus, the introduction of new goods into US technology could have done more to increase the US skill premium than a closed economy model would predict. I also explore how new Northern goods affect the Southern skill premium and what happens if new goods generate preference reversals across existing goods. I develop a two-step solution method that simplifies the analysis of many other comparative static exercises in a two-cone Heckscher-Ohlin model with a continuum of goods.