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Trade and the skill premium puzzle with capital market imperfections

Bonfatti, Roberto and Ghatak, Maitreesh (2010) Trade and the skill premium puzzle with capital market imperfections. Economic Organisation and Public Policy Discussion Papers, EOPP 020. STICERD, London, UK.

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Identification Number: EOPP 020

Abstract

An interesting puzzle is that trade liberalization in the 1980s and 1990s has been associated with a sharp increase in the skill premium in both developed and developing countries. This is in contrast with neoclassical theory, according to which trade should increase the relative return of the relatively abundant factor. We develop a simple model of trade with capital market imperfections, and show that trade can increase the skill premium in both the North and the South, and both in the short run as well as in the long run. We show that trade with a skill-intensive economy has two effects: it reduces the skilled wage, and thus discourages non talented agents out of the skilled labor force; and it reduces the cost of subsistence, thus allowing the talented offspring of unskilled workers to go to school. This compositional effect has a positive effect on the observed skill premium, possibly strong enough to counterweight the decrease in the skilled wage.

Item Type: Monograph (Discussion Paper)
Official URL: http://sticerd.lse.ac.uk/_new/publications/abstrac...
Additional Information: © 2010 The Authors
Subjects: H Social Sciences > HB Economic Theory
Sets: Departments > Economics
Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Collections > Economists Online
Date Deposited: 14 Apr 2011 10:50
Last Modified: 18 May 2011 09:52
URI: http://eprints.lse.ac.uk/id/eprint/35620

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