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Trade Liberalization and Wage Inequality: New Insights from a Dynamic Trade Model with Heterogeneous Firms and Comparative Advantage

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  • Wolfgang Lechthaler
  • Mariya Mileva

Abstract

We develop a dynamic general equilibrium trade model with comparative advantage, heterogeneous firms, heterogeneous workers and endogenous firm entry to study wage inequality during the adjustment after 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 an increase in inter-sectoral wage inequality, while in the medium to long run, wage inequality is driven by an increase in the skill premium. Incorporating worker training in the model considerably reduces the effects of trade liberalization on wage inequality. The effects on wage inequality are much more adverse when trade liberalization is unilateral instead of bilateral or restricted to specific sectors instead of including all sectors

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1886.

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Length: 66 pages
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:kie:kieliw:1886

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Keywords: trade liberalization; wage inequality; adjustment dynamics;

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Cited by:
  1. Wolfgang Lechthaler & Mariya Mileva, 2014. "Smoothing the adjustment to trade liberalization," WWWforEurope Working Papers series 61, WWWforEurope.
  2. Wolfgang Lechthaler & Mariya Mileva, 2014. "Smoothing the adjustment to trade liberalization," Kiel Working Papers 1948, Kiel Institute for the World Economy.

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