Research Paper Series Globalisation and Labour Markets International Competition, Returns to Skill and Labor Market Adjustment the Centre Acknowledges Financial Support from the Leverhulme Trust under Programme Grant F114/bf Acknowledgements We Are Grateful to Participants at the Midwest Internation

The finding, interpretations, and conclusions expressed in this paper are entirely those of the authors and do not necessarily reflect the views of the World Bank. Abstract This paper examines whether increased import competition induces domestic workers to skill upgrade and/or switch industries. The analysis makes use of a large unique longitudinal matched employer-employee dataset that covers virtually all workers and firms in Portugal over the 1986-2000 period. Our identification strategy uses two exogenous changes in the degree of international competition. First, we exploit the strong appreciation of the Portuguese currency in 1989-1992 and pre-existing differences in trade exposure across industries in a differences-indifferences estimation. Second, we make use of changes in industry-specific (source-weighted) real exchange rates. A bivariate probit model is used to analyse the impact of increased international competition on skill-upgrading and/or industry switching. Based on both empirical strategies, and on two different skill definitions, we find strong confirmation for the hypothesis that increased international competition increases the returns to skill and induces skill upgrading.