Uneven Effects, an Evolutionary Model of Poverty Traps After Trade Liberalization

Abstract

ABSTRACT This paper theoretically examines trade liberalization’s effects on workers’ human capital for a high-wage economy. Using an evolutionary game theory approach (EGT), we examine whether liberalization affects workers’ education, perhaps making them fall into a poverty trap. We find that, on average, workers increase their investment in human capital. We extend the investigation to include that, due to ex-ante historical and institutional circumstances, trade liberalization exerts heterogeneous effects on different types of workers and that the circumstances enabling them (or not) to educate differ. We find that liberalization makes some workers increase their human capital while other workers do not, leaving the latter more likely to fall into a poverty trap. By extending this investigation to the issues of trade liberalization and heterogeneous workers, we contribute to the EGT literature on poverty traps. Furthermore, unlike existing theoretical literature, which has ultimately argued that people’s different natural abilities are the reason behind their heterogeneous education responses, our analysis brings to the forefront the role of ex-ante historical and institutional factors. The paper also offers a novel theoretical foundation for empirical findings related to globalization’s effects on Americans’ education.