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

The main alternative explanation for the worldwide increase in wage inequality is exogenous
skill-biased technical change. It has been argued that technology can be at the root of the in-
crease in inequality because recent innovations in the production process, such as the widespread
introduction of computers, have boosted the relative productivity of skilled workers.¹⁸ A recent
literature on directed technical change, initiated by Acemoglu (1998, 1999), asks whether the bias
of technological change is endogenous. In these models, innovation originates in the skill abundant
North and is then exported to the South. An important implication is that innovation responds
to economic incentives in the North. In particular, it is shown that skill-complement innovations
are more profitable in a country relatively endowed with skilled workers. This implies that the
skill bias of technological change depends positively on the relative endowment of skilled workers
in the North. This result may help explain the puzzling concomitant increase both in the skill
premium and in the relative supply of skilled workers experienced by most advanced countries in
the last decades. The intuition is that the increase in the relative supply of skilled workers, which
would ceteris paribus depress the skill premium, strengthens the incentive to skill-complement in-
novations. Under certain conditions (in particular, a high elasticity of substitution between high
and low skilled-workers) the latter effect prevails and determines a rise in the skill premium in the
North. As far as the South is concerned, since it passively adopts the technology developed for
the needs of the North, it is bound to import more and more skill-complement machines, with a
consequent generalized increase in the relative demand for skilled labor and in the skill premium.

The literature on directed technical change can also shed light on the relation between interna-
tional trade and the skill bias of technical change. It is shown, in particular, that North-South trade
liberalization, by increasing the relative price of skill-intensive goods in the North, increases the
profitability of skill-complement innovations relative to unskill-complement innovations, thereby
magnifying the skill bias of technical change.

It is worth mentioning two other recent works investigating the link between international
¹⁸See, among others, Autor et al. [1998].

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