Self-selection, labour markets and capital markets

by Ohnsorge, Franziska

Self-Selection, Labour Markets and Capital Markets fiamiska Ohnsorge Doctor of Phiiosophy Graduate Department of Economics University of Toronto 2001 Self-selection is a market docation mechanism that is pervasive. Workers sort into jobs, fims sort into product and factor markets. My thesis analyses what effects selfselection mechanisms have on microeconomic phenornena such as the trade pattern and eamings inequality, and on macroeconornic phenornena such as the exchange rate and the capital account. The current work home trade models are based on relatively simplistic labour market assumptions. In my first essay, 1propose a model which instead incorpe rates a rich labour market mode1 of worker sorting, the Roy (1951) model. This model unites the long-run production and trade predictions of the Heckscher-Ohlin model with the short-run political economy predictions of the specsc factors model. In addition, it shows how even North-North trade can be based on endowments, being driven by differences in endowments inequaüty. In my second essay, 1 test t his model empiricdy. 1 focus on the determinants of within-industry earnings inequality during the 1980s and 1990s using data from the CF'S and the Bartehann-Becker-Gray database on productivity. The resdts overwhelmingly confirm the importance of skill-biased technological change in the rise in within-industry inequaüty during the sample period. In my third essay, 1 turn to the macroeconornic effects of fimu self-selecting into export markets and into the international capital market. Only the most productive KIRS are able to export into foreign product markets and only the most productive among these exporters are able to borrow on the international capital market. In such a setting, capital account liberalisa- tion has not only the standard effects on macroeconomic variables such as the exchange rate, but also on microeconomic variables such as aggregate firm productivity, firm exit and entry. The predictions generally match the developments in developing countries, most notably in Chile in the late 1970s and early 1980s. The analysis raises a note of caution: since capital account liberalisations have usudy taken place concurrently with trade liberalisations, studies which correlate firm productivity with trade liberaikation have to be interpreted carefully . 1 thank Dan Trefler, Nadia Soboleva, Michael Baker and Diego Puga for invaluable advice and guidance. 1 also thank my family and Shekhar Aiyar for unconditionai support without which this thesis would not have been possible.