Essays on Globalization, Skill Upgrading, and the Labor Market

Abstract

This dissertation contributes to our understanding of the impact of global integration on skill upgrading and labor market outcomes. Across the three chapters of this dissertation, I investigate how foreign direct investment shapes skill upgrading decisions made by households, how trade liberalization affects firms’ on-the-job training decisions, and how three dimensions of globalization (trade, FDI, and migration) exert an influence on the labor market. The first chapter develops a dynamic stochastic general equilibrium model to address how foreign direct investment affects skill upgrading and wage inequality following households’ endogenous labor training decisions. The model predicts that inward FDI in developing countries creates a positive productivity spillover effect on domestic firms and encourages more workers to invest in labor training to upgrade their skills. Lifting restrictions on FDI gives rise to higher wage inequality because multinational firms create more high-skill jobs and increase firm-level productivity. Compared to the special case with fixed high-skilled worker formation, the benchmark model with the skill upgrading channel produces smaller wage inequality over time. The second chapter studies the short-term heterogeneous impacts of an Asian trade agreement, APTA, on skill upgrading performed by Chinese manufacturers. First, we develop a general equilibrium model of trade with heterogeneous firms, endogenous export decisions, and endogenous skill upgrading decisions to explain firm performance following trade liberalization. Second, we test the theoretical model by means of generalized difference-in-difference estimations, which demonstrate that firms facing higher reductions in India’s tariffs invest more rapidly in on-the-job training. The effect of trade openness on export participation is the largest for firms with mid-range productivity, whereas that on training spending is the smallest for the same group of firms, which calls for policy attention. In the third chapter, panel structural vector autoregression is utilized to study how global integration affects the labor market based on data from 141 countries over the period of 1991-2021. Three dimensions of globalization are considered, including trade, foreign direct investment, and international migration. The empirical results show that trade globalization has more significant effects on labor market outcomes compared to financial globalization (FDI) and interpersonal globalization (labor migration). Specifically, trade integration is associated with higher labor productivity, a lower unemployment rate, a higher labor force participation rate, and lower income and wealth gaps between the top 10% and the bottom 50% of the population. Overall, the impact of globalization on labor market outcomes is similar in high-income countries and the rest of the world.