Justin Caron, Thibault Fally, James Markusen, 11 April 2020

Economists typically look to production and trade in order to explain various empirical phenomena. However, recent research has emphasised the role of demand in understanding several remaining empirical puzzles. This column discusses the implications of demand for the skill-premium puzzle. Goods and services with high income elasticities of demand are systematically skilled-labour intensive in production. Simulations then show that neutral productivity growth and/or falling trade costs increase the skill premium for virtually all countries. These results are particularly important for understanding why skill premia have increased in most developing countries, contrary to predictions from standard trade models. 


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