Skilled-Labor Intensity Differences Across Firms, Endogenous Product Quality, and Wage Inequality

Unjung Whang ()
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Unjung Whang: University of Colorado

Open Economies Review, 2016, vol. 27, issue 2, No 3, 292 pages

Abstract: Abstract This paper proposes a theory to explain the relative wage-rate increase for skilled labor that results from trade liberalization that relies on within-sector reallocations of production resources (skilled and unskilled labor) across firms. Motivated by some stylized facts, in a model with firm heterogeneity, including firms that differ in their skill intensity even within a narrowly defined industry, firms with relatively high skill intensity that are more likely to be exporters, and a positive association between a firm’s skill intensity and its product quality, I develop a general equilibrium model where firms with a higher skill intensity endogenously choose a higher-quality product, and tend to be more profitable. In this framework, a reduction in trade costs allows members of the workforce to reallocate to more efficient firms that produce higher-quality products, using their skilled labor more intensively, resulting in a rising skill premium. The main sources of the increasing wage inequality that followed trade openness are a positive link between a firm’s skill intensity, its product quality, and quality competition.

Keywords: Endogenous product quality; Quality competition; Skill intensity differences; Trade liberalization; Wage inequality (search for similar items in EconPapers)
JEL-codes: F12 F16 J31 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11079-015-9370-z

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