Labor Market Effects of Trade Induced Technological Change Under Intellectual Property Rights Protection

Abstract

In this paper I examine the impact of trade liberalization on labor market outcomes using a model with high- and low-skilled workers and intellectual property rights (IPR) protection. I argue that IPR protection is crucial to determine labor market effects of trade liberalization in skill-abundant countries. With IPR protection R&D firms fully internalize the greater market size for their innovation. This leads to low-skill-biased technological change countervailing the negative labor market effects of relative price changes in a Heckscher-Ohlin trade model (Stolper-Samuleson theorem). To solve the general equilibrium model I calibrate it to match the US labor market between 2008 and 2014. I demonstrate that IPR protection cushions the negative price effects of trade liberalization, i.e., the wage gap does not increase as much, all workers face lower unemployment rates and higher wages. Without IPR protection the wages for low skilled workers would decline and their unemployment rate increases after trade liberalization. Moreover, I use CPS (current population survey) data to empirically confirm the model predictions.