Per capita income and the demand for skills

Justin Caron, Thibault Fally and James Markusen

Chapter 12 in Broadening Trade Theory:Incorporating Market Realities into Traditional Models, 2021, pp 251-268 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Almost all of the literature about the growth of income inequaility and the relationship between skilled and unskilled wages approaches the issue from the production side of general equilibrium (skill-biased technical change, international trade). We add a role for income-dependent demand interacted with factor intensities in production. We explore how income growth and trade liberalization influence the demand for skilled labor when preferences are non-homothetic and when income-elastic goods are more intensive in skilled labor, an empirical regularity documented in Caron et al. (2014). To do so, we simulate the growth in both income and exports observed between 1995 and 2010 by adjusting sector-neutral productivity and trade costs. Relative to what we would obtain with homothetic preferences, we show that these changes lead to significant increases in the skill premium, especially in developing countries. Our results are mostly driven by productivity growth shifting consumption towards skill-intensive goods, but non-homothetic preferences also matter when evaluating the effect of trade. Overall, the negative effect of trade cost reductions on the skill premium predicted for developing countries under homothetic preferences (Stolper-Samuelson) is strongly mitigated, and sometimes reversed.

Keywords: Multinational Firms; Horizontal Multinationals; Vertical Multinationals; Internalization; Vertical Integration; Outsourcing; Foreign Affiliates; Per-Capita Income; Non-homothetic Preferences; Income Elasticity of Demand; Missing Trade Puzzle; Skill Premium Puzzle; Pro-competitive Gains From Trade; Complements; Externalities (search for similar items in EconPapers)
JEL-codes: F00 F02 F13 F41 F43 (search for similar items in EconPapers)
Date: 2021
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Related works:
Journal Article: Per capita income and the demand for skills (2020)
Working Paper: Per Capita Income and the Demand for Skills (2020)
Working Paper: Per Capita Income and the Demand for Skills (2017)
Working Paper: Per Capita Income and the Demand for Skills (2017)
Working Paper: Per-Capita Income and the Demand for Skills (2017)
Working Paper: Per Capita Income and the Demand for Skills (2017)
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