Learning by Trading and the Returns to Human Capital in Developing Countries

Abstract

Recent evidence shows that the returns to labor and the skill premium both increase in developing countries after trade liberalization, despite the low skill content of their exports. The author explains this apparent puzzle by arguing that trade increases technology transfers from industrial to developing countries and that the transfer technology is biased in favor of skilled labor. The relative demand for skilled labor increases during the transition following liberalization, and so the gains enjoyed by skilled labor are temporary, even in the absence of supply responses. The gains become longer lasting when the transferred technology is also skill-biased.

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