The Skill Bias of World Trade*


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     We are grateful to Philippe Aghion, Pol Antras, Olivier Blanchard, Alessandra Bonfiglioli, Giovanni Bruno, Francesco Caselli, Alan Deardorff, Henrik Horn, Gianmarco Ottaviano, Bob Staiger, Alessandro Turrini, Dieter Urban, seminar participants at IIES, Stockholm University, MIT, the EEA Annual Meeting (Venice, 2002), the CNR Conference (Milano, 2002) and especially Daron Acemoglu, Torsten Persson, Jaume Ventura, Fabrizio Zilibotti and two referees for helpful comments. The usual caveat applies. Gino Gancia thanks CREA, the Spanish Ministry of Education, grant SEJ2005-01126 and Generalitat de Catalunya, DURSI, SGR2005 0049 for financial support.


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.