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Globalization and wage premia: reconciliating facts and theory

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This paper analyzes the effect of globalization on wage premia by studying the interaction between trade costs, firm’s location decision and relative demand for labor. It suggests that globalization, through vertical specialization and/or agglomeration, increases inequality in relatively-skilled-abundant countries in a way that is observationally equivalent to skilled-biased technological progress (i.e., joint increased in the wage premium and the within-industry skilled-unskilled employment ratio). This hence confirms the potential role of international trade in explaining the observed increase in wage inequality between skilled and unskilled workers that occurred in most industrialized countries since the mid-1970s. Calibration of the model supports this result. It shows that NAFTA has contributed significantly to the observed increased in the U.S. wage premium.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2002/2002-39.pdf

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Copyright INSEAD. All rights reserved