A Schumpeterian Model of Protection and Relative Wages

American Economic Review (Impact Factor: 2.69). 01/1999; 89(3):450-472. DOI: 10.1257/aer.89.3.450
Source: RePEc

ABSTRACT This paper presents a dynamic general equilibrium model of R&D-based trade between two structurally identical countries in which both innovation and skill acquisition rates are endogenously determined. Trade liberalization increases R&D investment and the rate of technological change. It also reduces the relative wage of unskilled workers and results in skill upgrading within each industry when R&D is the skilled-labor intensive activity relative to manufacturing of final products. Time-series evidence from the United States and simulation analysis support the empirical relevance of the model, which offers a North-North trade explanation for increasing wage inequality.

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