Recent research by
Skill biased
heterogeneous firms, trade liberalization, and the skill premium
(joint with Ariell Reshef)
We propose a
theory that rising globalization and rising wage inequality are related because
trade liberalization raises the demand for highly competitive skill-intensive
firms. In our model, only the lowest-cost firms participate in the global
economy exactly along the lines of Melitz (2003). In addition to differing 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 1995. 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 differences,
so we provide an explanation for why globalization and wage inequality move
together in both skill-abundant and skill-scarce countries. In our model
countries are net exporters of the services of their abundant factor, but there
are no Stolper-Samuelson effects because import competition affects all
domestic firms equally.