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Variety-Skill Complementarity: A Simple Resolution of the Trade-Wage Inequality Anomaly

Kurokawa, Yoshinori (2010): Variety-Skill Complementarity: A Simple Resolution of the Trade-Wage Inequality Anomaly. Published in: Economic Theory , Vol. 46, (February 2011): pp. 297-325.

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Abstract

The Stolper-Samuelson theorem predicts that the relative wage of high-skilled to low-skilled labor will increase in the high-skill abundant U.S. but decrease in low-skill abundant Mexico after trade liberalization, while it actually began to rise in both countries in the late 1980s. We present a simple resolution of this "trade-wage inequality anomaly" in a model of variety trade. Variety trade increases the variety of intermediate goods used by the final good. If the varieties and high-skilled labor are complements, the skill premium rises in both countries. This linking of imports of new foreign varieties--the extensive margin--to wage inequality is compatible with evidence. Our numerical examples illustrate that small amounts of variety trade can produce a significant increase in relative wage.

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