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Microeconomic Issues

The article related to microeconomic issues which I have chosen for analysis is called “Intraindustry trade and the skill premium: Theory and evidence”. The purpose of this article is to study the relationship between the skill premium and trade between industries basing on the economic model which includes two countries, one sector of economy and two factor inputs (highly skilled labor and low skilled labor) (Dinopoulos et al, 2011). Under skill premium the authors mean the demand for skilled labor. Theoretical model is constructed for an industry in a sector with monopolistic competition where companies use two-factor inputs to create goods with horizontal differentiation (Dinopoulos et al, 2011). Using this model, authors studied the mechanism of income distribution based on demand in the conditions of markets with monopolistic competition.

Theoretical and practical findings of the article show that the transition from self-effectiveness (autarky) to intraindustry trade leads to the growth of the output volumes for the representative firm. At the same time, it was proved that the above-mentioned transition lowered skill premium in case if output-skill substitutability was witnessed, and increased skill premium, if output-skill complementarity took place (Dinopoulos et al, 2011). Thus, the effect of intraindustry trade on skill premium depends on the sign of the output elasticity of substitution.

Theoretical hypothesis was confirmed by a longitudinal research of Mexican plant-level data during the 1993-2003 period. For the chosen plant, analysis showed that wage elasticity of substitution was 0.29, output elasticity of substitution was equal to -0.073, and the gap of labor efficiency between high-skilled and low-skilled labor was 10% (statistically significant value) (Dinopoulos et al, 2011). These estimates allow to conclude that for this plant output-skill substitutability existed. The expected high correlation of plant output within the conditions of intraindustry trade as well as the dependency of skill level premium on the level of output control proved the correctness of the theoretical model.

This article involves several concepts studied in the Microeconomics class: monopolistic competition (chapter 11), free trade (chapter 37) and income inequality (chapter 20). The concepts of monopolistic competition and free trade are utilized to analyze the existing research and to construct a model of the intraindustry trade. The issues of income inequality are discussed in the context of the skill premium, and the gap between the demand for high-skilled labor and low-skilled labor is analyzed basing on the output elasticity of substitution.

References

Dinopoulos, E. & Syropoulos, C. & Xu, B. & Yotov, Y.V. (2011). Intraindustry trade and the skill premium: Theory and evidence. Journal of International Economics, 84(1), 15¬ – 25.