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Trade and Inequality: From Theory to Estimation

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  • Elhanan Helpman
  • Oleg Itskhoki
  • Marc-Andreas Muendler
  • Stephen Redding

Abstract

While neoclassical theory emphasizes the impact of trade on wage inequality between occupations and sectors, more recent theories of firm heterogeneity point to the impact of trade on wage dispersion within occupations and sectors. Using linked employer-employee data for Brazil, we show that much of overall wage inequality arises within sector-occupations and for workers with similar observable characteristics; this within component is driven by wage dispersion between firms; and wage dispersion between firms is related to firm employment size and trade participation. We then extend the heterogenous-firm model of trade and inequality from Helpman, Itskhoki, and Redding (2010) and structurally estimate it with Brazilian data. We show that the estimated model fits the data well, both in terms of key moments as well as in terms of the overall distributions of wages and employment, and find that international trade is important for this fit. In the estimated model, reductions in trade costs have a sizeable effect on wage inequality.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1138.

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Date of creation: Apr 2012
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Handle: RePEc:cep:cepdps:dp1138

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: Wage inequality; international trade;

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References

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  1. Gustavo Gonzaga & Naércio Menezes Filho & Maria Cristina Terra, 2005. "Trade liberalization and the evolution of skill earnings differentials in Brazil," Textos para discussão 503, Department of Economics PUC-Rio (Brazil).
  2. Munch, Jakob Roland & Skaksen, Jan Rose, 2008. "Human capital and wages in exporting firms," Journal of International Economics, Elsevier, vol. 75(2), pages 363-372, July.
  3. Helpman, Elhanan & Itskhoki, Oleg & Redding, Stephen J., 2009. "Inequality and Unemployment in a Global Economy," CEPR Discussion Papers 7353, C.E.P.R. Discussion Papers.
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  7. Elhanan Helpman & Oleg Itskhoki, 2010. "Labour Market Rigidities, Trade and Unemployment," Review of Economic Studies, Oxford University Press, vol. 77(3), pages 1100-1137.
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Citations

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Cited by:
  1. Marc J. Melitz & Stephen J. Redding, 2012. "Heterogeneous Firms and Trade," CEP Discussion Papers dp1183, Centre for Economic Performance, LSE.
  2. Egger, Hartmut & Egger, Peter & Kreickemeier, Udo, 2011. "Trade, wages, and profits," University of Tuebingen Working Papers in Economics and Finance 23, University of Tuebingen, Faculty of Economics and Social Sciences.
  3. Sebastian Krautheim & Tim Schmidt-Eisenlohr, 2012. "Wages and International Tax Competition," CESifo Working Paper Series 3867, CESifo Group Munich.
  4. Mario Macis & Fabiano Schivardi, 2012. "Exports and Wages: Rent Sharing, Workforce Composition or Returns to Skills?," Development Working Papers 333, Centro Studi Luca d\'Agliano, University of Milano, revised 16 Jul 2012.
  5. Johannes Pöschl & Neil Foster, 2013. "Productivity Effects of Knowledge Transfers through Labour Mobility," FIW Working Paper series 117, FIW.
  6. Thomas Sampson, 2012. "Selection into Trade and Wage Inequality," CEP Discussion Papers dp1152, Centre for Economic Performance, LSE.

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