The impact of trade margins on the skill premium: Evidence from Mexico

Abstract

This paper formulates a static applied general equilibrium model of a small open economy and then calibrates it to the Mexican input–output matrix for 1987. We use the calibrated model to quantify how much of the dramatic rise in the skill premium over the period 1987–1994, following the liberalization of the trade policy in Mexico, can be accounted for by the change in the extensive margin of trade or trade variety. Our numerical experiments show that the increase in the extensive margin of Mexican manufactured trade with the U.S. can account for up to approximately 12 percent of the actual increase in skill premium in Mexico from 1987 to 1994.