Globalization, the skill premium, and income distribution: the role of selection into entrepreneurship

Mingzhi (Jimmy) Xu

Review of World Economics (Weltwirtschaftliches Archiv), 2020, vol. 156, issue 3, No 7, 633-668

Abstract: Abstract This paper proposes a novel channel by which trade affects the skill premium and the household income distribution: the selection-into-entrepreneurship mechanism. Trade liberalization intensifies competition for profit, discouraging less able educated workers from sorting into entrepreneurship and increasing the skill supply. As a result, the return to college declines, leading college enrollment to decrease. We illustrate this mechanism with a simple trade model and show that while highly talented households optimally respond to export opportunities by engaging in entrepreneurial investment and moving up the income distribution, less able educated households self-select downward along the income distribution, which gradually results in household income polarization. Using Chinese household survey data, we employ a Bartik-type instrument for export expansion to investigate how globalization affects the return to college, the selection into entrepreneurship, and the income distribution. The analysis shows that regions facing more export exposure are associated with a larger drop in the skill premium, a greater selection effect on household business ownership, and a stronger polarization pattern in the household income distribution. The entrepreneurship angle highlighted by this paper offers another lens through which to study the broader impact of trade shocks on workers’ occupation sorting and the distribution of income.

Keywords: Trade; Occupational choice; Entrepreneurship; Income polarization; China (search for similar items in EconPapers)
JEL-codes: F11 F16 I24 J24 L2 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://link.springer.com/10.1007/s10290-020-00374-2 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:weltar:v:156:y:2020:i:3:d:10.1007_s10290-020-00374-2

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/10290/PS2

DOI: 10.1007/s10290-020-00374-2

Access Statistics for this article

Review of World Economics (Weltwirtschaftliches Archiv) is currently edited by Paul Bergin, Holger Görg, Cédric Tille and Gerald Willmann

More articles in Review of World Economics (Weltwirtschaftliches Archiv) from Springer, Institut für Weltwirtschaft (Kiel Institute for the World Economy) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().