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Two-Country Dynamic Model of Trade with Heterogeneous Firms and Comparative Advantage

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  • Wolfgang Lechthaler
  • Mariya Mileva

Abstract

We develop a dynamic trade model with comparative advantage, heterogeneous firms and workers and endogenous firm entry to study wage inequality during the adjustment to trade liberalization. We find that trade liberalization increases wage inequality both in the short run and in the long run. In the short run, wage inequality is mainly driven by inter-sectoral wage inequality, while in the long run, wage inequality is driven by an increase in the skill premium. It is not a good idea to exclude certain sectors from trade liberalization, because that greatly reduces the benefits of trade liberalization, while failing to protect vulnerable workers.

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Bibliographic Info

Paper provided by WWWforEurope in its series WWWforEurope Working Papers series with number 12.

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Length: 52
Date of creation: Jul 2013
Date of revision:
Publication status: published
Handle: RePEc:feu:wfewop:y:2013:m:7:d:0:i:12

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Postal: WWWforEurope Project Office Austrian Institute of Economic Research Arsenal Objekt 20 A-1030 Vienna
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Keywords: Trade liberalization; wage inequality; adjustment dynamics;

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Cited by:
  1. Karl Aiginger & Kurt Kratena & Margit Schratzenstaller & Teresa Weiss, 2014. "Moving towards a new growth model," WWWforEurope Deliverables series 3, WWWforEurope.
  2. Braun, Sebastian & Lechthaler, Wolfgang & Mileva, Mariya, 2014. "The effects of globalization on wage inequality: New insights from a dynamic trade model with heterogeneous firms," Kiel Policy Brief 70, Kiel Institute for the World Economy (IfW).

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