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Two-Country Dynamic Model of Trade with Heterogeneous Firms and Comparative Advantage. WWWforEurope Working Paper No. 12

Author

Listed:
  • Mariya Mileva
  • Wolfgang Lechthaler

    (Kiel Institute for the World Economy)

Abstract

We develop a dynamic trade model with comparative advantage, heterogeneous firms and workers and endgenous firm entry to study wage inequality during the adjustment to trade liberalisation. We find that trade liberalisation 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 liberalisation, because that greatly reduces the benefits of trade liberalisation, while failing to protect vulnerable workers.

Suggested Citation

  • Mariya Mileva & Wolfgang Lechthaler, 2013. "Two-Country Dynamic Model of Trade with Heterogeneous Firms and Comparative Advantage. WWWforEurope Working Paper No. 12," WIFO Studies, WIFO, number 46859, April.
    • Handle: RePEc:wfo:wstudy:46859
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    References listed on IDEAS

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    Cited by:

    1. Karl Aiginger, 2016. "New Dynamics for Europe: Reaping the Benefits of Socio-ecological Transition – Part I: Synthesis. WWWforEurope Deliverable No. 11," WIFO Studies, WIFO, number 58791, February.
    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 Kiel).
    3. Karl Aiginger & Kurt Kratena & Margit Schratzenstaller & Teresa Weiss, 2014. "Moving Towards a New Growth Model. WWWforEurope Deliverable No. 3," WIFO Studies, WIFO, number 47247, February.
    4. Mariya Mileva & Sebastian Braun & Wolfgang Lechthaler, 2013. "The Effects of Globalisation on Wage Inequality: New Insights from a Dynamic Trade Model with Heterogeneous Firms. WWWforEurope Working Paper No. 49," WIFO Studies, WIFO, number 47093, February.

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