Import Variety and Skill Premium in a Calibrated General Equilibrium Model: The Case of Mexico

Abstract

It can be theoretically shown that imports of new foreign varieties--an increase in the extensive margin of imports--can be a possible channel for increased skill premium in wages. No past studies, however, have quantified how much of the increase in skill premium can be accounted for by the increase in the extensive margin. This paper formulates a static applied general equilibrium model and then calibrates it to the Mexican input-output matrix for 1987. In the calibrated model, our numerical experiments show that the extensive margin growth in Mexican manufactured imports from the U.S. can account for up to approximately 15 percent of the actual increase in skill premium in Mexico from 1987 to 1994. It indicates that the increase in import variety reinforced the increase in Mexican skill premium that was caused by the Mexican export side.