shows that a production or price shock that increases the relative wages of skilled workers induces significant skill acquisition by the existing workforce.<sup>4</sup> Understanding the implications of increased competition for skill acquisition is important given the theoretical possibility of poverty traps generated by lack of education and occupational choice (Barham et al. 1995; Banerjee and Newman, 1993), and the role of human capital accumulation in growth. To date, however, this relationship has not been subject to empirical scrutiny.

Our paper makes two contributions. We begin by providing further evidence on the impact of within-industry changes in competition on returns to skill using longitudinal matched employee-employer data for Portugal. The data we use cover virtually all workers and firms in the private sector over the 1986-2000 period, and are supplemented with industry-level information on imports by the country of origin. The worker and firm dimensions of our data are particularly important for our purposes, as they allow us to account for the role of firm characteristics and composition effects.<sup>5</sup> Our identification strategy involves two exogenous measures of changes in international competition. First, following Cu ̃nat and Guadalupe (2005) and Guadalupe (2007), we exploit a strong appreciation of the Portuguese currency in 1989-1992 (over 25%) and pre-existing differences in cross-industry trade exposure in a differences-in-differences estimation.<sup>6</sup> Second, following Revenga (1992), Campa and Goldberg (2001) and Bertrand (2004), we make use of industry-specific real exchange rates, for which we have data for a later period (1991-2000). Based on both strategies, and on two different skill definitions, we find strong confirmation for the hypothesis that within-industry increases in international competition are an important determinant of rising wage inequality.

The second, and perhaps most important, contribution of this paper is to investigate whether changes in international competition also cause skill upgrading and industry switching. Using the aforementioned empirical strategies to identify exogenous changes in foreign competition, we estimate transition probabilities between skills and/or industries (controlling for worker, firm and sector characteristics) in a bivariate probit specification. We distinguish between four alternatives: no change; moving industry; skill upgrading; and moving industry and skill upgrading. Our results provide strong support to the view that labor market adjustment to

> 4Modeling worker transitions induced by a trade shock is also the focus of Davidson and Matusz (2000, 2002 and 2004), who consider the consequences of industry specific human capital for the adjustment process, and Long et al. (2007) who consider firm specific human capital.

> 5See Abowd and Kramarz (1999) and Abowd et al (2006) for a detailed discussion of the effects of the exclusion of these effects on earnings regressions.

> 6In a related literature, Frias, Kaplan and Verhoogen (2009) (for Mexico); Araujo and Paz (2014) (for Brazil); and Macis and Schivardi (2016) investigate the relationship between exports and wage premia exploiting sudden and large exchange rate devaluation episodes as a source of exogenous variation in the firms’ incentive to export.

3