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Research Institute of Industrial Economics (IFN) Working Paper Series

No 471:
A Schumpeterian Model of Protection and Relative Wages

Elias Dinopoulos and Paul Segerstrom

Abstract: This paper presents a dynamic general equilibrium model of trade between two advanced countries in which both innovation and skilled acquisition rates are endogenously determined. The model offers a North-North (as opposed to a North-South) trade explanation for increasing relative wage inequality. A global reduction in trade barriers increases R&D investment and accelerates the pace of technological progress. It also reduces the relative wage of unskilled workers and results in skill upgrading, if and only if R&D is the skill-intensive activity relative to manufacturing of final products. Trade liberalization does not affect domestic relative prices in either of the two countries.

Keywords: Economic growth; R&D; Protection; Relative Wages; (follow links to similar papers)

JEL-Codes: D41; F10; F12; F13; (follow links to similar papers)

42 pages, October 1996

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