Escaping the Losses from Trade: The Impact of Heterogeneity on Skill Acquisition, with Gaston Navarro and Ricardo Reyes-Heroles

Future generations of workers can invest in education and avoid the negative consequences of trade openness for low-skilled workers. We exploit variation in exposure to import penetration shocks across space in the United States to show that greater exposure (i) deteriorated labor market conditions for workers without a college education and (ii) increased overall college enrollment, while (iii) the increase in enrollment was entirely driven by students in richer households. To analyze the welfare implications of the effects of trade openness on college enrollment, we propose a dynamic multi-region model of international trade with heterogeneous agents. The model features incomplete credit markets and costly endogenous skill acquisition by new cohorts of workers. We calibrate the model to match trends in aggregate trade data for the United States between the late 1980s and 2010, and differential exposure to import penetration across regions in 1990. A decline in import barriers generates increased college enrollment and positive welfare gains for all workers in the long-run. However, these gains are concentrated on workers with a college education, whose welfare gains are twice as large as those of non-college workers. While all workers in the manufacturing sector lose from grater trade openness, a small number of college educated workers in manufacturing with low wealth experience the greatest losses. Increasing college enrollment for new cohorts over time plays a crucial role in allowing new generation of workers to escape the potential welfare losses form trade. However, low-wealth/low-income generations of households take the longest to acquire skills. They are therefore the last to experience positive gains from trade openness, and in some cases may not realize any gains within a life-time.