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GTAP Resource #6143

"Per Capita Income and the Demand for Skills"
by Caron, Justin, Thibault Fally and James Markusen

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). 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 when income-elastic goods are more intensive in skilled labor, an empirical regularity documented in Caron, Fally and Markusen (2014). To do so, we simulate the growth in both income and ex- ports observed between 1995 and 2010 by adjusting sector-neutral productivity and trade costs. Relative to what we would obtain with homothetic preferences, we show that these changes lead to significant increases in the skill premium, especially in developing countries. Our results are mostly driven by productivity growth shifting consumption towards skill-intensive goods, but non- homothetic preferences also matter when evaluating the effect of trade. 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: Non-homothetic preferences, skill premium, per capita income, structural change, international trade
JEL Classification: F10, O10, F16, J31

Resource Details (Export Citation) GTAP Keywords
Category: 2020 Conference Paper
Status: Published
By/In: Presented during the 23rd Annual Conference on Global Economic Analysis (Virtual Conference)
Date: 2020
Created: Caron, J. (4/17/2020)
Updated: Caron, J. (5/18/2020)
Visits: 694
- Calibration and parameter estimation
- Labor market issues

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