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DECTI Trade Seminar: Skill Biased Heterogeneous Firms

Sponsor: Development Economics and Chief Economist (DEC)

SpeakerAriell Reshef, University of Virginia, joint with James Harrigan

Abstract: We live in an era of rising globalization and rising wage inequality. We propose a theory that suggests that these phenomena are related because trade liberalization raises the relative demand for skilled workers in all countries. In our model, only the lowest-cost firms participate in the global economy exactly along the lines of (Melitz 2003). In addition to di¤ering in their productivity, firms in our model differ in their skill intensity. We model skill-biased technology as a correlation between skill intensity and technological acumen, and we estimate this correlation to be large using firm-level data from Chile in 1996. Skill-biased technological heterogeneity implies that, on average, the most competitive firms are also the most skill-intensive. As a consequence, a fall in trade costs leads to both greater trade volumes and an increase in the relative demand for skill, as the lowest-cost/most-skilled firms expand to serve the export market while less skill-intensive non-exporters retrench in the face of increased import competition. This mechanism works regardless of factor endowment di¤erences. Thus we provide an explanation for why globalization and wage inequality move together in both skill-abundant and skill-scarce countries.

For Information: Yasmin D Souza

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