Ricardo Reyes-Heroles - Federal Reserve Board

We study skill acquisition as a margin of adjustment to trade shocks. We exploit variation in import penetration across U.S. regions to identify the effects of trade on skill acquisition decisions and labor market outcomes. We provide evidence of increased college enrollment by young individuals in U.S. regions more exposed to import competition. Yet, this increased enrollment is driven by individuals in wealthier households. In line with these results, we also find that the deterioration in labor market outcomes for adult workers in more exposed regions is largely driven by the outcomes of workers without a college education. Guided by our empirical findings, we develop a spatial model of trade with costly skill acquisition decisions and endogenous wealth dynamics. Our model implies that skill acquisition is a key margin of adjustment in determining the long-run distributional welfare consequences of trade.