Trade Liberalization, Educational Choice, and Income Distribution

Abstract

This examines the dynamic impacts of trade liberalization on individuals' educational choices and income distribution. Our focus is on a developing economy that has a comparative advantage in the low-skill-intensive, agricultural sector, since it is far from obvious whether opening to trade induces the development of industries that serve as an engine of growth and give incentives to citizens to acquire human capital in those countries. Our theoretical model illustrates that In the long run trade induces capital accumulation, raising the wage rate for high-skilled workers who engage in capital-intensive manufacturing industries. As a result, "education polarization" arises such that more individuals will receive tertiary education, despite that the pool of low-skilled workers also expands as a direct consequence of the expansion of the agricultural sector. We also illustrate transitional dynamics that follow trade liberalization and examine the impact of trade on different skill groups in different generations.

Keywords: International Trade, educational choice, education polarization, income inequality, overlapping generations model