International Trade, Growth and Wage Inequality - The Role of Human Capital Formation

In a “New Trade”model with endogenous supply of skill, how knowledge difussion through international trade a¤ects growth and skill premium depends on responsiveness of skill supply to technological change. The less responsive is skill supply, the more likely that lower skill-premium accompanies higher growth after opening to trade. 1 Introduction This project deals with the question of what e¤ects international trade has in determining economic growth and wage inequality. The answer turns out to depend critically on the responsiveness of skill-supply in a country. If skill supply is highly resistant to in‡ow of new ideas through international trade, trade tends to increase growth and release high-skilled labor to production sector, lowering wage inequality. However, if skill supply is rather responsive to newly available ideas higher growth rate accompanied by increasing inequality is possible. This theoretical ‡exibility has the potential to explain the uneven growth in supply and demand for skilled labor in the US in the 1970’s and the rising wage inequality widely observed in developing countries in the last few decades. In section 2 I build a closed economy expanding variety model with highskilled labor being the input of R&D research. Growth, however, is only possible if R&D bene…t from the externality of ideas available in the economy. This version of the model establish skill supply as a source of growth. In section 3 I allow for skill supply to respond to expected wage income and labor’s innate talent in a Blanchard (1985) and Acemoglu (1998) set up. As a consequence, supply of skill responds positive to growth since in an under high-growth regime, the opportunity cost of forgoing low-skilled wage is smaller. Section 4 puts together R&D growth and skill-supply in a trade model between two symmetric countries in a “new-trade”model in which the demand for traded good comes from love for variety and supply of traded good relies on monopolistic power of