Three essays on new goods, skill premium, trade and the home market effect.

Abstract

Chapter 1 examines the effects of new goods on the relative wages of skilled-labor and trade patterns in a two-cone Heckscher-Ohlin model and shows that: (i) new goods can be a valid theoretical explanation for the rising skill-premium in the U.S.; (ii) new goods have both domestic and international factor market effects, and their interplay determines the outcome and leads to surprising results; (iii) new goods that are friendly to the abundant (scarce) factors move the relative factor prices in the direction of convergence (divergence). The setup is general in the goods dimension so that the introduction of new goods is completely unrestricted, and the results apply to any one or any combination of the relative demand shocks for skilled-labor. Chapter 2 identifies and measures new goods in the U.S. manufacturing sector in the late 1970s and 1980s, and finds that: (i) The average skilled-labor intensity of new goods exceeds that of old goods by over 40%; (ii) even within 4-digit industries, new goods are slightly more skilled-labor intensive than old goods (by about 4%); (iii) new goods can account for about 30% of the increase in the relative demand for skilled-labor. Therefore, new goods help explain the rising skill-premium in the U.S. Furthermore, new goods provide a direct measure of technological changes so that this chapter provides new evidence that technology has shifted demand in favor of skilled-labor. Chapter 3 tests for the home market effect using a difference-in-difference gravity specification by selecting pairs of exporting countries that belong to a common preferential trade area and examining their exports of high-transport-cost and strong-scale-economy goods relative to their exports of low-transport-cost and weak-scale-economy goods. When measuring exporter size using national GDP, support for home-market effects is strong for very high-transport-cost industries and weak for moderately high-transport-cost industries. However, when measuring exporter size using market potential, which accounts for demand links between proximate countries, the pattern reverses. These results suggest that in very high-transport-cost industries only national market size matters for production location, but in moderately high-transport-cost industries both home demand and demand from nearby countries determine production location.