Trade and Technology: Decomposing the Rise of the Skill Premium in the Colombian Manufactoring Sector

Abstract

In this paper I develop a framework that provides a simple and explicit mechanism for understanding and quantifying the role of trade and technology in the rise of the skill premium in developing countries. The distinguishing features of the model can be summarized as follows: Under capital‐skill complementarity, a rise in the demand for capital will increase the wage gap. Three different forces may spur demand for capital. First, increased trade, which may raise output as well as lower the cost of imported machinery and equipment. Second, technological change, understood as a decrease in the price of capital. Finally, structural reforms may also affect the demand for capital by changing its relative price. Based on the model, an empirical methodology is developed to quantify the contribution of each of these factors to the rise in the skill premium of the Colombian manufacturing sector. I find that trade liberalization accounted for a 17% of the rise in the skill premium and exogenous technological change explains 32%. The rest is explained by other structural reforms implemented as part of the general process of globalization, mainly changes in the exchange rate and foreign investment regimes.