BESS - Trade and Worker De-skilling (with Rui Costa and Stephen Machin)
This paper presents new evidence on international trade and worker outcomes, by examining a big world event that produced an unprecedentedly large shock to the UK exchange rate. In the 24 hours in June 2016 during which the UK electorate unexpectedly voted to leave the European Union, the value of sterling plummeted. It recorded the biggest depreciation that has ever occurred in any of the world’s four major currencies since the collapse of Bretton Woods. Exploiting this variation, the paper studies the im- pact of trade on wages and future earnings potential measured by job related education and training. Wages and training fell for workers employed in sectors where the inter- mediate import price rose by more as a result of the massive sterling depreciation. Calibrating the estimated wage elasticity with respect to intermediate import prices to theory uncovers evidence of complementarity between workers and intermediate imports. This provides new direct evidence that, in the modern world of global value chains, changes in the cost of intermediate imports act as an important driver of the impact of globalization on worker welfare. The episode studied also adds to widely expressed, growing concerns about patterns of real wage stagnation in contemporary labour markets.