Relative Wages and Trade-Induced Changes in Technology

We develop a model where trade liberalization leads to skill-biased technological change, which in turn raises the relative return to skilled labour. As firms get access to a larger market, they have incentives to choose a more skill-intensive technology because a lowering of variable costs requires additional use of skilled labour. This way, we establish a link between trade, technology and relative returns to skilled and unskilled labour. Moreover, we show that as market integration continues and trade costs fall below a certain threshold, the relative return to skilled labour may fall.Imperfect Competition; Technology; Trade; Trade Liberalization; Wages