New goods and the skill premium

In a two-cone Heckscher-Ohlin model with CES preferences and a continuum of goods, new northern goods increase the northern skill premium if they are skilled-labor intensive, and may increase the premium if they are unskilled-labor intensive. Thus, the introduction of new goods into US technology could have done more to increase the US skill premium than a closed-economy model would predict. I also explore how new northern goods affect the southern skill premium and what happens if they generate preference-induced reversals across existing goods. I develop a two-step solution method that simplifies comparative static analyses in the two-cone Heckscher-Ohlin model. (c) 2006 Elsevier B.V. All rights reserved.