Trade, wages and skill accumulation in the emerging giants

Concerns over rising inequality have threatened to slow the process of trade liberalization in emerging economies, such as China and India. But even if trade liberalization raises inequality, these effects may be short lived and associated with important dynamic effects such as capital and skill accumulation. Using a simple dynamic open economy model we show that trade liberalization can induce substantial human capital accumulation, and that the transition path for the skill premium can be non-monotonic. We then consider a higher dimensional version of the model which is calibrated to data for China and India. In both cases trade liberalization generates a jump in the skill premium on impact, and a fall in the long run. It also generates strong wage growth for both skilled and unskilled labor and substantial accumulation of skilled labor.