Sorting It Out: International Trade with Heterogeneous Workers

Each worker brings a bundle of skills to the workplace, for example, quantitative and communication skills. Since employers must take this bundle as a package deal, they choose workers with just the right mix of skills. We show that international differences in the distribution of worker skill bundles-for example, Japan's abundance of workers with a modest mix of both quantitative and teamwork skills-have important implications for international trade, industrial structure, and domestic income distribution. Formally, we model two-dimensional worker heterogeneity and show that the second moments of the distribution of skills are critical, as in the Roy model. (c) 2007 by The University of Chicago. All rights reserved..