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Trade Liberalisation and the Wage Skill Premium in Korean Manufacturing Plants: Do Plants’ R&D and Investment Matter?

This paper examines the effects of output and input tariff reductions on within-plant wage skill premium in Korean manufacturing plants. We find evidence that output tariff reduction interacts differently with plants’ R&D and investment behaviours, respectively, to affect wage skill premium. More specifically, output tariff reduction increases wage skill premium mostly in R&D-performing plants while reducing it mostly in plants making positive facility investments. While there is weak evidence that input tariff reduction increases wage skill premium, no such interactive effects are found. One story behind our results is that, although both R&D and facility investments may respond to changes in profit opportunities due to output tariff reductions, R&D raises the relative demand for the skilled workers while facility investment, an activity of increasing production capacity, raises the relative demand for the unskilled workers.