International Competition, Returns To Skill And Labor Market Adjustment

This paper examines whether increased import competition induces domestic workers to skill upgrade and/or switch industries. The analysis makes use of a large unique longitudinal matched employer-employee dataset that covers virtually all workers and firms in Portugal over the 1986-2000 periods. The identification strategy uses two exogenous changes in the degree of international competition. First, the authors exploit the strong appreciation of the Portuguese currency in 1989-1992 and pre-existing differences in trade exposure across industries in a differences-in-differences estimation. Second, they make use of changes in industry-specific (source-weighted) real exchange rates. A bivariate probit model is used to analyse the impact of increased international competition on skill-upgrading and/or industry switching.