Premium
Trade costs, quality and the skill premium
Author(s) -
Bekkers Eddy,
Francois Joseph,
Manchin Miriam
Publication year - 2016
Publication title -
canadian journal of economics/revue canadienne d'économique
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.773
H-Index - 69
eISSN - 1540-5982
pISSN - 0008-4085
DOI - 10.1111/caje.12228
Subject(s) - monopolistic competition , quality (philosophy) , unit (ring theory) , competition (biology) , economics , core (optical fiber) , business , labour economics , microeconomics , international economics , computer science , telecommunications , mathematics , philosophy , mathematics education , epistemology , monopoly , ecology , biology
Abstract We develop a monopolistic competition model with non‐homothetic factor input bundles where increasing quality requires increasing use of skilled workers. As a result more skill abundant countries export higher quality, higher priced goods. Using a multi‐country dataset, we test and confirm the findings in Schott of a positive effect of skill abundance on unit values identified with US data. We extend the core model with per unit trade costs leading to the Washington apples effect that goods shipped over larger distance are of higher quality. The combination of high‐quality goods being relatively skill intensive with the Washington apples effect implies that countries at a larger distance from their trading partners display a higher skill premium. Simulating our model, we find that a doubling of distance of a country relative to all its trading partners raises the skill premium in a country by about 1.6%.