Working Paper

Trade, Labor Reallocation Across Firms and Wage Inequality

Abstract: This paper develops a framework for studying the effects of higher trade openness on the wage distribution that emphasizes within-industry labor reallocation across firms, strong skill-productivity complementarities in production and heterogenous fixed export costs across firms. Assuming no entry in the industry, an autarkic economy that opens to trade experiences a pervasive rise in wage inequality; a trade liberalization in a trading economy increases inequality at the lower end of the distribution, but may reduce it elsewhere. Assuming free entry, opening to trade could result in pervasively higher inequality or wage polarization. The analysis highlights the importance of new exporters (extensive margin) in shaping the aggregate relative demand for skills, a channel controlled by the distribution of fixed export costs in the model.

Keywords: Trade; Firms; Supermodularity; Wage inequality; Workers;

JEL Classification: F10; F12; F16;

https://doi.org/10.17016/IFDP.2022.1348

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 2022-06-22

Number: 1348