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Factor price overshooting with trade liberalization: theory and evidence

Factor price overshooting with trade liberalization: theory and evidence This paper develops an intra‐industry trade model with skilled and unskilled labor as factors of production, endogenous accumulation of skilled labor and firm heterogeneity in factor intensities to examine the effect of trade reforms on factor prices. Since exporters are more skill intensive than non–exporters, a decrease in trade barriers initially increases wage inequality between skilled and unskilled workers, as a result of an increase in the relative demand for skilled labor. Over time, however, as agents respond to the change in relative wages by investing in skilled labor, the relative wage of skilled labor decreases. Evidence from Chilean plant–level data supports the idea of factor price overshooting with trade liberalization. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Scottish Journal of Political Economy Wiley

Factor price overshooting with trade liberalization: theory and evidence

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References (57)

Publisher
Wiley
Copyright
© 2013 Scottish Economic Society
ISSN
0036-9292
eISSN
1467-9485
DOI
10.1111/sjpe.12006
Publisher site
See Article on Publisher Site

Abstract

This paper develops an intra‐industry trade model with skilled and unskilled labor as factors of production, endogenous accumulation of skilled labor and firm heterogeneity in factor intensities to examine the effect of trade reforms on factor prices. Since exporters are more skill intensive than non–exporters, a decrease in trade barriers initially increases wage inequality between skilled and unskilled workers, as a result of an increase in the relative demand for skilled labor. Over time, however, as agents respond to the change in relative wages by investing in skilled labor, the relative wage of skilled labor decreases. Evidence from Chilean plant–level data supports the idea of factor price overshooting with trade liberalization.

Journal

Scottish Journal of Political EconomyWiley

Published: May 1, 2013

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