Trade Liberalization and the Skill Premium: A Local Labor Markets Approach

Rafael Dix-Carneiro,Brian K Kovak

doi:10.1257/aer.p20151052

Rafael Dix-Carneiro, Brian K Kovak

Open Access

https://doi.org/10.1257/aer.p20151052

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Abstract

We develop a specific-factors model of regional economies that includes two types of workers, skilled and unskilled. The model delivers a simple equation relating trade-induced local shocks to changes in local skill premia. We apply the methodology to Brazil's early 1990s trade liberalization and find statistically significant but modest effects of liberalization on the evolution of the skill premium between 1991 and 2010. The methodology uses widely available household survey data and can easily be applied to other countries and liberalization episodes.

Highlights

The national economy consists of many regions, r, each of which may produce goods in many industries, i
Production is Cobb-Douglas, and factor shares θT i, θLi, and θHi may vary across industries, subject to θT i + θLi + θHi = 1
Suppress regional subscripts on all terms, and let aT i, aLi and aHi be the respective quantities of specific factor, unskilled labor, and skilled labor used to produce one unit of industry i output

Summary

Online Appendix

The national economy consists of many regions, r, each of which may produce goods in many industries, i. Producers in all regions face the same national vector of liberalization-induced price changes Pi. Suppress regional subscripts on all terms, and let aT i, aLi and aHi be the respective quantities of specific factor, unskilled labor, and skilled labor used to produce one unit of industry i output. AHi − aT i = Ri − s ∀i, where Ri, w, and s are the respective wages of specific factors, unskilled labor, and skilled labor Combining these with the factor market clearing conditions in (A4) and (A5), we have (A8). We can express the equilibrium factor market clearing and zero profit conditions in (A8), (A9), and (A10) in matrix form To solve this system for the change in skill premium, first rewrite it in more compact matrix notation.

PλLi i θT i i θ λLi i θT i Hi

Findings

Results