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Selection into Trade and Wage Inequality

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  • Thomas Sampson
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    Abstract

    This paper analyzes the impact of trade integration on wage inequality when there is heterogeneity across both workers and firms. By incorporating labor assignment into the heterogeneous firms literature I develop a model in which positive assortative matching between worker skill and firm technology explains the employer size-wage premium and the exporter wage premium. Under trade, fixed export costs cause the selection of high productivity, high skill firms into exporting and an upwards shift in the firm technology distribution. Consequently, the demand for skill and wage inequality increase in all countries, both on aggregate and within the export sector. This result holds both when firms' technologies are determined by a random draw and when technology is endogenous to firm level R&D. With endogenous technology, the increased demand for skill caused by trade liberalization results from technology upgrading by new exporters.

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    Bibliographic Info

    Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1152.

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    Date of creation: Jun 2012
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    Handle: RePEc:cep:cepdps:dp1152

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

    Related research

    Keywords: Wage inequality; matching; technology; skills; trade;

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    1. Davidson, Carl & Matusz, Steven J. & Shevchenko, Andrei, 2008. "Globalization and firm level adjustment with imperfect labor markets," Journal of International Economics, Elsevier, vol. 75(2), pages 295-309, July.
    2. Paula Bustos, 2009. "Trade Liberalization, Exports and Technology Upgrading: Evidence on the Impact of MERCOSUR on Argentinean Firms," 2009 Meeting Papers 1029, Society for Economic Dynamics.
    3. Pol Antràs & Luis Garicano & Esteban Rossi-Hansberg, 2005. "Offshoring in a Knowledge Economy," Discussion Papers 04-020, Stanford Institute for Economic Policy Research.
    4. 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.
    5. Arnaud Costinot, 2009. "An Elementary Theory of Comparative Advantage," Econometrica, Econometric Society, vol. 77(4), pages 1165-1192, 07.
    6. Thierry Mayer & Marc J. Melitz & Gianmarco I.P. Ottaviano, 2011. "Market Size, Competition, and the Product Mix of Exporters," NBER Working Papers 16959, National Bureau of Economic Research, Inc.
    7. Mary Amiti & Donald R. Davis, 2008. "Trade, Firms, and Wages: Theory and Evidence," NBER Working Papers 14106, National Bureau of Economic Research, Inc.
    8. Elhanan Helpman & Oleg Itskhoki, 2010. "Labour Market Rigidities, Trade and Unemployment," Review of Economic Studies, Oxford University Press, vol. 77(3), pages 1100-1137.
    9. Giulia Faggio & Kjell Salvanes & John Van Reenen, 2007. "The Evolution of Inequality in Productivity and Wages: Panel Data Evidence," CEP Discussion Papers dp0821, Centre for Economic Performance, LSE.
    10. Stephen Redding & Oleg Itskhoki & Marc-Andreas Muendler & Elhanan Helpman, 2012. "Trade and Inequality: From Theory to Estimation," 2012 Meeting Papers 135, Society for Economic Dynamics.
    11. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," NBER Working Papers 12365, National Bureau of Economic Research, Inc.
    12. Jan Eeckhout & Philipp Kircher, 2011. "Identifying sorting: in theory," LSE Research Online Documents on Economics 29708, London School of Economics and Political Science, LSE Library.
    13. Franziska Ohnsorge & Daniel Trefler, 2007. "Sorting It Out: International Trade with Heterogeneous Workers," Journal of Political Economy, University of Chicago Press, vol. 115(5), pages 868-892, October.
    14. Monte, Ferdinando, 2009. "Skill Bias, Trade, and Wage Dispersion," MPRA Paper 14719, University Library of Munich, Germany.
    15. Arnaud Costinot & Jonathan Vogel, 2009. "Matching and Inequality in the World Economy," NBER Working Papers 14672, National Bureau of Economic Research, Inc.
    16. Lentz, Rasmus, 2010. "Sorting by search intensity," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1436-1452, July.
    17. Ariel Burstein & Jonathan Vogel, 2010. "Globalization, Technology, and the Skill Premium: A Quantitative Analysis," NBER Working Papers 16459, National Bureau of Economic Research, Inc.
    18. Paula Bustos, 2011. "The Impact of Trade Liberalization on Skill Upgrading Evidence from Argentina," Working Papers 559, Barcelona Graduate School of Economics.
    19. Thorsten Schank & Claus Schnabel & Joachim Wagner, 2006. "Do exporters really pay higher wages? First evidence from German linked employer-employee data," Working Paper Series in Economics 28, University of Lüneburg, Institute of Economics.
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    Cited by:
    1. Gene M. Grossman, 2013. "Heterogeneous Workers and International Trade," NBER Working Papers 18788, National Bureau of Economic Research, Inc.
    2. Philipp Kircher (University of Edinburgh), 2013. "Matching and Sorting in a Global Economy," ESE Discussion Papers 227, Edinburgh School of Economics, University of Edinburgh.
    3. Sarra Ben Yahmed, 2012. "Gender Wage Gaps across Skills and Trade Openness," AMSE Working Papers 1232, Aix-Marseille School of Economics, Marseille, France, revised Nov 2012.
    4. Marc J. Melitz & Stephen J. Redding, 2012. "Heterogeneous Firms and Trade," NBER Working Papers 18652, National Bureau of Economic Research, Inc.

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