Trade Liberalization and the Skill Premium: A Local Labor Markets Approach

Trade economists have long studied the effects of globalization on wage differences between workers with different levels of skill or education. This literature has generally sought to link globalization to changes in the economy-wide skill premium. Attanasio et al. (2004) and Gonzaga et al. (2006) are salient examples that investigate whether changes in sector-specific prices or tariffs, changes in skill composition within and across sectors, and movements in the skill premium are consistent with the predictions of workhorse trade models, such as the Heckscher-Ohlin model. However, there is little evidence directly establishing a causal effect of globalization on the skill premium. More recently, a growing body of research has focused on trade’s differential effects across local markets within a country. In this paper, we combine these two strands of literature by developing a theoretically consistent approach to studying the causal effect of trade liberalization on the skill premium at the local level.