Trade-Induced Structural Change and the Skill Premium

We study how international trade affects manufacturing employment and the relative wage of unskilled workers when goods and services are traded with different intensities. Manufacturing trade reduces manufacturing prices worldwide, which reduces manufacturing employment if manufactures and services are complements. International trade also raises real income, which reduces manufacturing employment if services are more income elastic than manufactures. Manufacturing production is unskilled-labor-intensive, so that these changes increase the skill premium. We incorporate these mechanisms in a quantitative trade model and show that reductions in trade costs had a negative impact on manufacturing employment and the relative wage of unskilled workers.