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Factor Price Overshooting with Trade Liberalization: Theory and Evidence

Julian Emami Namini and Ricardo López
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Julian Emami Namini: Erasmus University Rotterdam

No 52, Working Papers from Brandeis University, Department of Economics and International Businesss School

Abstract: This paper develops an intra-industry trade model with skilled and unskilled labor as factors of production, endogenous accumulation of skilled labor and firm heterogeneity in factor intensities to examine the effect of trade reforms on factor prices. Since exporters are more skill intensive than non-exporters, a decrease in trade barriers initially increases wage inequality between skilled and unskilled worker, as a result of an increase in the relative demand for skilled labor. Over time, however, as agents respond to the change in relative wages by investing in skilled labor, the relative wage of skilled labor decreases. Evidence from Chilean plant-level data supports the idea of factor price overshooting with trade liberalization.

Keywords: Intra-industry trade; Firm heterogeneity in factor intensities; Wage inequal- ity; Overshooting; Impact versus long run effect; Chile (search for similar items in EconPapers)
JEL-codes: F12 E22 O41 O54 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2012-09
New Economics Papers: this item is included in nep-int
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http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP52.pdf First version, 2012 (application/pdf)

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Journal Article: Factor price overshooting with trade liberalization: theory and evidence (2013) Downloads
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