Abstract
This paper proposes and quantifies a novel mechanism through which trade integration can affect the skill premium. When complementarities across sectors are strong, trade integration in low-skilled intensive sectors reduces the employment share of these sectors and rises the skill premium. We document that, in a broad set of countries over the past three decades, the share of domestically produced goods in absorption has declined dramatically in low-skill labor intensive sectors and remained roughly constant in high-skill labor intensive sectors. Using a quantitative multi-country, multi-sector model of trade and labor heterogeneity, we show that these changes in trade patterns account for roughly half of the decline in the share of goods-producing sectors in gross output. In our baseline calibration, this generates a 4 percent increase in the skill premium in the average country of our sample, as well as in the US. The increase in the skill premium is much larger in developing countries where the highly traded sectors are particularly unskilled-intensive.
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