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American Economic Journal: Macroeconomics: Vol. 5 No. 2 (April 2013)

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Capital-Skill Complementarity and the Skill Premium in a Quantitative Model of Trade

Article Citation

Parro, Fernando. 2013. "Capital-Skill Complementarity and the Skill Premium in a Quantitative Model of Trade." American Economic Journal: Macroeconomics, 5(2): 72-117.

DOI: 10.1257/mac.5.2.72

Abstract

Technological change has reduced the relative price of capital goods. Reductions in trade costs make it cheaper to import capital goods. With capital-skill complementarity, both can increase the skill premium. I construct a general-equilibrium trade model with capital-skill complementarity to study the impact of changing worldwide trade costs and technologies on the skill premium. The impacts of trade costs and technical change are comparable, especially in developing countries, and much larger than Stolper-Samuelson effects. I find that both skilled and unskilled labor gain from trade, and that larger gains from trade are associated with larger increases in the skill premium. (JEL E22, F11, F16, J24, O33)

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Authors

Parro, Fernando (Federal Reserve Board)

JEL Classifications

E22: Capital; Investment; Capacity
F11: Neoclassical Models of Trade
F16: Trade and Labor Market Interactions
J24: Human Capital; Skills; Occupational Choice; Labor Productivity
O33: Technological Change: Choices and Consequences; Diffusion Processes

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