Scandinavian Working Papers in Economics

Seminar Papers,
Stockholm University, Institute for International Economic Studies

No 707: The Skill Bias of World Trade

Paolo Epifani () and Gino Gancia
Additional contact information
Paolo Epifani: Universit√° di Parma, Postal: via Universita 12, 43100 Parma, Italy
Gino Gancia: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden

Abstract: We argue that, with an elasticity of substitution in consumption greater than one and higher scale economies in the skill-intensive sectors, the entire volume of world trade matters for wage inequality. This implies that trade integration, even among identical countries, is likely to increase the skill premium. This result can also explain the increase in skill premia in developing countries that have experienced drastic trade liberalizations. Further, we argue that evidence of a falling relative rpice of skill-intensive goods can be reconciled with the fast growth of world trade and that the intersectoral mobility of capital exacerbates the effect of trade on inequality. We provide new empirical evidence in support of our results and a quantitative assessment of the skill bias of world trade.

Keywords: Skill Premium; Scale Effect; Intra-Industry and Inter-Industry Trade

JEL-codes: F12

31 pages, March 24, 2002

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