Trade, skill formation and inequality: a monopolistic competition perspective

This paper focuses on the skill formation in considering the impacts of trade on labor markets. Although workers are identical as unskilled labor, they differ in their productivity as skilled. Workers become skilled by incurring the training costs. Intro-ducing the above settings into a trade model with monopolistic competition, we show that trade enhances skill formation and lowers the nominal income inequality, which are consistent with the observed facts. Although these changes make all agents better off, it works stronger for skilled workers than for unskilled workers, leading to larger inequality in utility (real income). Finally, we examine the possible effects of foreign direct investment on the labor market structure as well