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Factor price overshooting with trade liberalization: theory and evidence
Author(s) -
Namini Julian Emami,
López Ricardo A.
Publication year - 2013
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/sjpe.12006
Subject(s) - economics , wage inequality , factor price , free trade , wage , relative price , labour economics , liberalization , production (economics) , wage rate , inequality , international economics , monetary economics , macroeconomics , microeconomics , market economy , mathematical analysis , mathematics
This paper develops an intra‐industry trade model with skilled and unskilled labor as factors of production, endogenous accumulation of skilled labor and firm heterogeneity in factor intensities to examine the effect of trade reforms on factor prices. Since exporters are more skill intensive than non–exporters, a decrease in trade barriers initially increases wage inequality between skilled and unskilled workers, as a result of an increase in the relative demand for skilled labor. Over time, however, as agents respond to the change in relative wages by investing in skilled labor, the relative wage of skilled labor decreases. Evidence from Chilean plant–level data supports the idea of factor price overshooting with trade liberalization.