Abstract
AbstractFollowing the U.S.–Mexico trade integration, the skill premium rose dramatically in Mexico. Standard trade theory predicts the skill premium in a skill‐scarce country should fall—not rise—following such an integration. This article reconciles theory and data by building a model in which intermediate producers in Mexico begin to produce for the U.S. supply chain following liberalization. To do so, they must rent ideas from the United States, which are more skill‐intensive, thus increasing the skill premium. This mechanism is supported by the data: Mexican plants and industries that trade more with the United States rent more U.S. technology and have higher skill premia.
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