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Trade and the allocation of talent with capital market imperfections

Bonfatti, Roberto and Ghatak, Maitreesh (2012) Trade and the allocation of talent with capital market imperfections. Journal of International Economics, 89 (1). pp. 187-201. ISSN 0022-1996

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Identification Number: 10.1016/j.jinteco.2012.07.005

Abstract

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 apparent conflict with neoclassical theory, according to which trade should decrease the relative return on the relatively scarce factor, and thus decrease the skill premium in skill-scarce developing countries. We develop a simple model of trade with talent heterogeneity and capital market imperfections, and show that trade can increase the skill premium in a skill-scarce South that opens up to a skill-abundant North, both in the short run as well as in the long run. We show that trade has two effects: it reduces the skilled wage, and therefore drives non talented agents out of the skilled labor force. It also reduces the cost of subsistence, thereby allowing the talented offspring of unskilled workers to go to school. This compositional effect has a positive effect on the observed skill premium, potentially strong enough to outweigh the decrease in the skilled wage. In our framework, trade liberalization may trigger an increase in the skill-premium in both the North and the South.

Item Type: Article
Official URL: http://www.journals.elsevier.com/journal-of-intern...
Additional Information: © 2012 Elsevier
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: 07 Nov 2012 14:53
Last Modified: 04 Jun 2014 15:18
URI: http://eprints.lse.ac.uk/id/eprint/46808

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