The Skill Bias of World Trade

This article suggests that international trade, even between identical countries, can raise the relative demand for skilled labour. It shows that a simple generalisation of Krugman's (1979) model of trade in differentiated products has implications for the skill premium, through economies of scale rather than Hecksher-Ohlin effects, that are consistent with a number of stylised facts. It provides new evidence in support of these results by showing that increases in market size lead to higher returns to education, skill premia and income inequality.