Trade, Technology Adoption and Wage Inequalities: Theory and Evidence
Paper No' CEPDP0902:
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Keywords: Firm heterogeneity; trade reforms, technology adoption, skill premium, plant panel data
JEL Classification: F10; F12;F41
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This Paper is published under the following series:
CEP Discussion Papers
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This paper develops a model of trade that features heterogeneous firms, technology choice and
different types of skilled labor in a general equilibrium framework. Its main contribution is to explain
the impact of trade integration on technology adoption and wage inequalities. It also provides
empirical evidence to support the model’s predictions using plant-level panel data from Chile’s
manufacturing sector (1990-1999). The theoretical framework offers a possible explanation of the
puzzling increase in skill premium in the developing countries. The key mechanism is found in the
effects of trade policy on the number of new firms upgrading technology and on the skill-intensity of
labor. Trade liberalization pushes up export revenues, raising the probability that the most productive
exporters will upgrade their technology. These firms then increase their relative demand for skilled
labor, thereby raising inequalities.