EconPapers    
Economics at your fingertips  
 

Per-Capita Income and the Demand for Skills

Justin Caron, Thibault Fally () and James Markusen ()

No 12077, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Almost all of the literature about the growth of income inequality and the relationship between skilled and unskilled wages approaches the issue from the production side of general equilibrium (skill-biased technical change, international trade). Here, we add a role for income-dependent demand interacted with factor intensities in production. We explore how income growth and trade liberalization influence the demand for skilled labor when preferences are non-homothetic and income-elastic goods are more intensive in skilled labor, an empirical regularity documented in Caron, Fally and Markusen (2014). In one experiment, counterfactual simulations show that sector neutral productivity growth, which generates shifts in consumption towards skill-intensive goods, leads to significant increases in the skill premium: in developing countries, a one percent increase in productivity leads to a 0.1 to 0.25 percent increase in the skill premium. In several countries, including China and India, simulations suggest that the historical growth experienced in the last 25 years may have led to an increase in the skill premium of more than 10%. In a second experiment, we show that trade cost reductions generate quantitatively very different outcomes once we account for non-homothetic preferences. These imply substantially less predicted net factor content of trade and allow for a shift in consumption patterns caused by trade-induced income growth. Overall, the negative effect of trade cost reductions on the skill premium predicted for developing countries under homothetic preferences (Stolper-Samuelson) is strongly mitigated, and sometimes reversed.

Keywords: International Trade; non-homothetic preferences; per capita income; skill premium (search for similar items in EconPapers)
JEL-codes: F10 F16 J31 O10 (search for similar items in EconPapers)
Date: 2017-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12077 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Per capita income and the demand for skills (2020) Downloads
Working Paper: Per Capita Income and the Demand for Skills (2017) Downloads
Working Paper: Per Capita Income and the Demand for Skills (2017) Downloads
Working Paper: Per Capita Income and the Demand for Skills (2017) Downloads
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:cpr:ceprdp:12077

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... rs/dp.php?dpno=12077

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2020-10-14
Handle: RePEc:cpr:ceprdp:12077