GEP 10/08: Trade Liberalisation and Human Capital Adjustment

Summary

This paper highlight how the characteristics of unskilled workers, particularly age and ability, affect when and whether they opt for skill upgrading in response to an unanticipated and an announced (to take place at a known future date) liberalisation,. It also identifies winners and losers among adjusters and the patterns of adjustment/skill acquisition.

Abstract

This paper highlights the way in which workers of different age and ability are affected by anticipated and unanticipated trade liberalisations. A two-factor (skilled and unskilled labour), two-sector Heckscher-Ohlin trade model is supplemented with a education sector which uses skilled labour and time to convert unskilled workers into skilled workers. A skilled worker’s income depends on her ability, but all unskilled workers have the same income. Trade liberalisation in a relatively skilled labour abundant country increases the relative skilled wage and induces skill upgrading by the existing workforce, with younger and more able unskilled workers most likely to upgrade. But not all upgraders are better off as a result of the liberalisation. The older and less able upgraders are likely to lose. For an anticipated liberalisation we show that the preferred upgrading strategies depend on a worker’s ability and that much of the upgrading will take place before the liberalisation. Hence some workers who would have upgraded had they anticipated the liberalisation will not if it is unanticipated, and that adjustment assistance that applies only to post-liberalisation upgraders will fail to compensate some losers and distort the upgrading decisions of others.

Download the paper in PDF format

Authors

Rod Falvey, David Greenaway and Joana Silva

View all GEP discussion papers | View all School of Economics featured discussion papers