IV : skill development for better labor market outcomes

On the one hand, the Stolper-Samuelson (SS) corollary of the Heckscher-Ohlin theorem predicts that both trade and FDI should take advantage of the abundance of low-skilled labour in DCs and so imply an increasing demand for domestic low skilled labour and hence decreasing within-country wage dispersion and income inequality (Wood, 1994 and 1997; for a critical view, see Milanovic, 2002). On the other hand, the Feenstra and Hanson (1996 and 1997) model points out that what is unskillintensive in a developed country may be skill-intensive in terms of the labour market of the DC; accordingly, shifting production from developed towards developing countries (both through FDI and import/export trade relationships) may imply increasing inequality both in the former and in the latter. For instance, outsourcing of production through FDI from the U.S. to Mexico implies that plants which were relatively intensive in unskilled labour in the U.S. would be relatively skillintensive in Mexico (with a higher ratio of skilled/unskilled labour than domestic plants), thus implying skill-shortage, raising relative wages and so income inequality.