Trade Liberalisation and Human Capital Adjustment

This paper highlights the way in which workers of different age and ability are affected by anticipated and unanticipated trade liberalisations. A two-factor (skilled and unskilled labour), two-sector Heckscher-Ohlin model is supplemented with an education sector which uses skilled labour and time to convert unskilled into skilled workers. A skilled worker’s income depends on ability, but all unskilled workers have the same income. Trade liberalisation in an abundant country increases the relative wage and induces skill upgrading by existing workforce. Younger and more able workers are most likely to upgrade, but not all are better off after liberalisation: Older and less able upgraders are likely to lose. For an anticipated liberalisation the preferred upgrading strategies depend on ability and much of the upgrading takes place before liberalisation. This implies that some workers who would have upgraded had they anticipated the liberalisation will not do so if it is unanticipated, and post-liberalisation adjustment assistance will fail to compensate some losers and distort the upgrading decisions of others.