Comparative Advantage and Human Capital: A Cross-Country Quantitative Analysis

Abstract

This paper studies how trade openness affects welfare through changes in workers’ skill acquisition. We first document that on-the-job training participation varies largely across sectors and that schooling investments are complementary to on-the-job learning. Thus, trade openness impacts on-the-job skill formation through sector reallocation and trade-induced changes in schooling investments. Motivated by the empirical evidence, we develop a multisector Eaton–Kortum model, in which skill intensities and on-the-job learning opportunities are heterogeneous across sectors. Workers decide whether to become skilled before entering the labor market, and accumulate human capital on the job. Through the lens of our model, trade-induced sector reallocation changes the returns of becoming skilled and on-the-job learning opportunities. Our calibrated model suggests that the gains from trade due to changes in skill acquisition are vastly different across countries and that richer countries tend to enjoy better on-the-job learning opportunities after trade openness.

Keywords: gains from trade, Education, on-the-job learning