The Effects of Globalization on Skilled Labor, Unskilled Labor, and the Skill Premium

This paper numerically simulates a dynamic general equilibrium model of a small open economy highlighting the contrasting effects of different aspects of globalization on the skill premium. Trade liberalization in the form of reductions in consumption and input tariffs are both shown to reduce the short-run skill premium. Over time the lower consumption tariff reduces it further, while the lower input tariff increases it. Financial liberalization in the form of reduced financial frictions increases the skill premium in the short run, but reduces it over time. The sensitivity and robustness of these patterns to structural characteristics are addressed in detail. Overall, the results stress the importance of taking a disaggregated and dynamic approach to evaluate the effects of globalization on the skill premium.