Skill Acquisition and the Gains from Trade: A Cross-country Quantitative Analysis

This paper studies the impact of trade openness on welfare through alterations in workers' skill acquisition. We integrate endogenous choices of learning investments into a multisector Eaton-Kortum model. In the model, workers can opt to become skilled through education and further enhance their human capital via on-the-job training. Both education and on-the-job training entail time and material costs. Our model reveals that trade openness influences skill acquisition by: (1) reallocating labor between sectors, as skill intensities and on-the-job learning opportunities vary across sectors; and (2) allowing producers in each country to source varieties from more cost-effective suppliers in other countries, thus reducing unit costs of material inputs and raising real wage rates. Our calibrated model indicates that the gains in skill acquisition account for 20% of the total gains from trade. We also find that the gains in skill acquisition primarily stem from increased real wage rates that encourage skill acquisition.