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This paper studies the labor market impacts of trade liberalization, andspecifically tariff reductions, with a focus on the wage gap between skilled andunskilled workers in presence of vertical linkages in the fixed costs of production.To that purpose, we develop and empirically test a monopolistic competition modelwith variable elasticity of substitution and labor differentiated by skill level, whereskilled workers are the residual claimants of savings on imported inputs. Consistentlywith the model predictions, we find that a 10% reduction in tariffs implies onaverage a 3.8% increase in the wage gap. In addition, the same level of tariffreduction is expected to lower unskilled employment in domestic production by3.3%, which is partially offset by an expansion of unskilled employment in theexport segment of production. These results are obtained matching detailed internationaltrade data with World Input–Output Tables and EU KLEMS data oncountry-sector wage by skill level on 17 OECD countries from 1996 to 2005.JRC.B.3-Territorial Developmen

Trade liberalization and the wage gap: the role of vertical linkages and fixed costs