Skill Acquisition and the Dynamics of Trade-Induced Inequality

This paper quanti\u85es the impact of trade liberalization on wage inequality between workers of di¤erent skill levels and across age groups. I propose a model in which trade liberalization increases the demand for skill due to production share reallocation across \u85rms and technology switching. However, unlike in the existing literature, I endogenize the skill supply by sup-plementing the skill-demand side of the model with an overlapping-generations model of skill acquisition. I calibrate the model to 2007 US data and simulate the economys transition path in response to the removal of policy trade barriers. Workers have rational expectations and, therefore, must take into account the general-equilibrium e¤ects on wages of changes in skill supply during the economys transition. I \u85nd that the aggregate gains from trade liberaliza-tion, de\u85ned as the increase in discounted real earnings relative to their pre-liberalization level, are 5.9%. However, these gains are not distributed evenly among workers. For those alive at the time of implementation of the new trade policy, the oldest educated workersdiscounted real lifetime earnings increase by 9.9%, while the oldest uneducated workersdiscounted real lifetime earnings increase by only 1.5%. On the one hand, ignoring the economys transition leads to an understatement of trade-induced inequality as this fails to account for transitory inequality. On the other hand, ignoring the endogeneity of the skill supply leads to an over-statement of trade-induced inequality as this fails to account for the equalizing e¤ect of the endogenous skill-supply adjustment