Relative wages and trade-induced changes in technology

Abstract

We develop a model where trade liberalization leads to skill-biased technological change, which in turn raises the relative return to skilled labor. When firms get access to a larger market, the relative profitability of di¤erent technologies changes so that the relative profitability of the more skill-intensive technology increases. As the composition of firms changes to one with predominantely skill-intensive firms, the relative demand for skilled labor increases. This way, we establish a link between trade, technology and relative returns to skilled and unskilled labor.