The Skill Bias of World Trade

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 price 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 Classification: F12, F161