are skill-intensive relative to the latter, this implies that trade-induced output share reallocations
among firms with different skill-intensity can be a crucial determinant of industry skill upgrading
and rising wage inequality.
8) There is evidence of a substantial increase in the demand elasticity for unskilled labor and
of a stable or decreasing demand elasticity for skilled labor, although it is not clear whether the
upward trend in the former is trade-induced. From a theoretical standpoint, the labor demand
elasticity is relevant because its rise generally brings about a rise also in wage volatility. As for
the latter, however, there is direct evidence that firms exposed to international competition face a
higher wage volatility than firms belonging to the non-traded sectors.
9) There is no evidence of substantial employment contraction in import competing sectors
after trade reforms. This implies that a dramatic short-run surge in unemployment is not a likely
consequence of trade liberalization. One possible explanation for this result is that, at least in
the short-run, the tendency toward contraction of the comparative disadvantage sectors is offset
by other forces. For instance, in the presence of imperfect competition, trade liberalization, by
reducing mark-ups, may force firms to expand output and employment to cover fixed costs.
In short, trade liberalization brings about efficiency gains, mainly through a reallocation of
resources toward more efficient, outward oriented and skill-intensive firms. In turn, this involves
skill upgrading, higher wage inequality and higher wage volatility. All this suggests that a greater
availability of skilled workers may magnify the efficiency gains from trade reform, on the one hand,
and dampen its negative distributional effects on the other. These results naturally lead to the
policy implication that a successful trade liberalization should be accompanied by policies aimed
at improving the average level of education of the workforce. This would in fact facilitate the
expansion of more efficient skill-intensive firms and the absorption of imported technology, while
at the same time reducing the pressure on the skill premium.
As far as India is concerned, a further policy suggested by the somewhat disappointing evi-
dence on the effects of trade reform on Indian firms’ productivity growth is to further deregulate
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