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CEP Discussion Paper
The Effect of Trade on the Demand for Skill - Evidence from the Interstate Highway System
Guy Michaels
December 2006
Paper No' CEPDP0772:
Full Paper (pdf)

JEL Classification: F16; J23; J31

Tags: skill premium; trade; highways

Since changes in trade openness are typically confounded with other factors, it has been difficult to identify the labor market consequences of increased international trade. The advent of the United States Interstate Highway System provides a unique policy experiment, which I use to identify the effect of reducing trade barriers on the relative demand for skilled labor. The Interstate Highway System was designed to connect major metropolitan areas, to serve national defence and to connect the United States to Canada and Mexico. As a consequence – though not an objective – many rural counties were also connected to the highway system. I find that these counties experienced an increase in trade-related activities, such as trucking and retail sales, by 7-10 percentage points per capita. Most significantly, by increasing trade the highways raised the relative demand for skilled manufacturing workers in counties with a high endowment of human capital and reduced it elsewhere, consistent with the predictions of the Heckscher-Ohlin model.