The Impact of Trade Liberalization on Skill Upgrading Evidence from Argentina

Abstract

The integration of developing countries in the world economy during the last three decades has often coincided with increases in the skill premium. These trends are at odds the predictions of the Heckscher-Ohlin trade model where trade opening in skill-scarce developing countries leads to a reduction in the skill premium. Thus, the recent literature has proposed several alternative channels through which trade liberalization can increase the relative demand for skill in developing countries. In particular, the empirical finding that exporters are more skillintensive than non-exporters suggests that expanded export opportunities might induce firms to upgrade skill. In this paper I present a model where trade liberalization induces the most productive firms (exporters) to adopt skill-intensive production technologies. I test the model in the context of a regional free trade agreement, MERCOSUR. I find that the increase in the relative demand of skilled labor does not come from labor reallocation across sectors or firms but from skill upgrading within firms. In addition, firms that upgrade technology faster also upgrade skill faster. Finally, I find that the reduction in Brazil's tariffs induces the most productive Argentinean firms to upgrade skill, while the least productive ones downgrade, as predicted by the model.