Trade Liberalization, Firm Performance and Labour Market Outcomes in the Developing World: What Can We Learn from Micro-LevelData?



factor proportions effect, international trade will spur inequality even in the skill-poor developing
economies, making the model consistent with the evidence of rising skill-premia in developing
countries that have experienced trade liberalizations.

The authors also show that physical capital accumulation leads to higher skill premia, and that
the intersectoral mobility of capital is likely to magnify the effects of trade integration on wage
inequality. These findings are consistent with both the evidence on capital relocation towards skill-
intensive sectors (Caselli, 1999) and the large literature on capital-skill complementarity (Krusell
et al, 2000).

Manasse and Turrini (2001) are the first to study the effects of intra-industry trade on labor
market outcomes in the presence of heterogeneous firms and workers. They build a one sector
monopolistic competition trade model a la` Krugman (1980). Production of each variety involves a
constant marginal requirement in terms of a raw input and one unit of skilled labor as a fixed cost.
Workers are heterogeneous in terms of skills. High-skilled workers produce high quality varieties
and earn higher wages, since quality is valued by consumers. Trade liberalization has striking
implications for income distribution. Because of foreign competition, all firms loose market shares
in their domestic market. At the same time, the access to foreign markets represents a concrete
opportunity to expand total sales and profits only for some firms. The reason is that access to
foreign markets entails a fixed cost. Hence, only those firms whose profits are higher than the fixed
cost of exporting can effectively break into foreign markets. As a consequence, high-skilled workers
employed in firms producing high quality goods see their earnings rise after trade integration.
Conversely, less-skilled workers employed in firms producing only for the domestic market see
their earnings fall after trade integration. Thus, the model provides a trade-induced mechanism
of reallocation of resources and increasing wage dispersion which operates at the firm rather than
the sectoral level. Further, it is in line with the plant-level empirical evidence (reported below)
showing that changes in the skill premia are significantly associated with the export status of firms.

Trade-induced skill-biased technical change

32



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