Trade, education, and the shrinking middle class

We develop a new model of trade in which educational institutions drive comparative advantage and the distribution of human capital within and across countries. Our framework exploits a multiplicity of sectors and a continuous support of human capital choices to demonstrate that freer trade can induce crowding out of the middle occupations toward the skill acquisition extremes in one country and simultaneous expansion of middle-income industries in another. Individual gains from trade may be non-monotonic in workers' ability, and middle ability agents can lose the most from trade liberalization. Comparing trade and education policies, our model indicates that targeted education subsidies like Trade Adjustment Assistance are the most effective mechanism to bolster the middle class. (C) 2016 The Authors. Published by Elsevier B.V.