the returns to schooling, for increases in wage inequality is cliché. In fact, in many countries, such as Chile and Mexico, the market-determined income inequality (that is, without transfers) has improved, as the trends in skill premiums turned downwards. The graphs in Figure 2, taken from Aedo and Walker (2011, p. 46), show the evolution of education wage premiums for several LCR economies since the early 1990s. The era of rising premiums for finishing secondary school seems to have ended at the beginning of the 21<sup>st</sup> Century, although in Chile tertiary education premiums might have risen a bit since.

Nonetheless, these trends do not say much about the role of trade in determining relative wages of skilled workers. First, as highlighted by Broda and Romalis (2009), trends in relative incomes and wages would need to be adjusted by household-specific price indexes, with trade playing a potentially important role in determining consumption prices across households. As mentioned, most studies ignore this first-order price effect, probably because it is difficult to get detailed price data at the household or locality level, but it is not impossible as evidenced by the paper on Chile by Duran et al. (2010). In addition, unit values computed from household survey data could be used as an imperfect proxy.

Second, even if trade raises skill premiums, other factors, such as increases in the supply of high school graduates, the quality of educational services, and numerous other economic fluctuations unrelated to trade could be affecting trends in skill premiums. Furthermore, skills might affect not only the earning potential of workers, but also their capacity to change jobs when hit by a negative shock.

Finally, it is worth noting that recent literature has emphasized that the act of exporting per se and of exporting to high-income destinations in particular might require skilled workers, although the types of skills (e.g., knowledge of foreign languages) demanded by successful exporting firms remain murky (see Veerhogen 2008, Matsuyama 2007, Brambilla et al. 2010, Brambilla et al. 2011). All these considerations point to a role of skills as a potentially important intermediating factor shaping trade’s influence on IG.

# **III. Trade and Inclusive Growth: Firms**

To recap, a distinguishing feature of the IG approach is its focus on long term growth and on how individuals and firms are incorporated into the growth process. The previous section focused on individuals, through the prism of household incomes and consumption. This section turns our attention to the firm.

It is useful to begin from first principles by focusing on firm profits. Allowing for multi-product firms, a simple profit function can be written in the following form, which mimics the household welfare function introduced earlier: (3) .

In this setup, total profits of a firm are given by the sum of the difference between the prices of goods denoted by j minus the unit costs of production. These costs are determined by a productivity parameter, alpha, which is the unit factor input requirements that is standard in the trade literature. This parameter tells us how many units of a factor of production are needed to produce a unit of 8