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.

factor productivity, numerical model, price dynamics, skilled labor, trade liberalization, trade reform, wage gap
dx.doi.org/10.1111/sjpe.12006, hdl.handle.net/1765/40805
Scottish Journal of Political Economy
Erasmus School of Economics

Namini, J.E, & López, R.A. (2013). Factor price overshooting with trade liberalization: Theory and evidence. Scottish Journal of Political Economy, 60(2), 139–181. doi:10.1111/sjpe.12006