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Trade, Technological Change, and Wage Inequality:The Case of Mexico

Andrea Waddle ()

No 1185, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: In the decade following the Mexico-U.S. trade integration, the manufacturing skill premium rose by almost 60 percent in Mexico and by only 12 percent in the U.S. Standard trade theory predicts that when countries with different levels of skilled labor integrate, the skill premium should fall - not rise - in the skill-scarce country. In this paper, I reconcile theory and data by building a model in which intermediate goods are produced using rented technology. After integration, producers in Mexico begin to rent technologies from the United States, which are more advanced and, hence, more skill-intensive. This has two effects: The skill premium in Mexico rises due to adoption of the more advanced technology and the skill premium in the U.S. rises due to increased investment in this technology, which is driven by the increased marginal return on technology arising from its adoption in Mexico. The mechanism is supported by industry-level evidence: Mexican industries which are integrated into the U.S. supply chain have higher skill premia than their non-integrated counterparts. The calibrated model can account for about two-thirds of the increase in the skill premium in each country.

New Economics Papers: this item is included in nep-dge and nep-int
Date: 2017
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