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Firm Heterogeneity and the Labor Market Effects of Trade Liberalization

In: International Trade and Labor Markets Welfare, Inequality and Unemployment

Author

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  • Hartmut Egger
  • Udo Kreickemeier

Abstract

This chapter develops a model that incorporates workers’ fair wage preferences into a general equilibrium framework with monopolistic competition between heterogeneous firms à la Melitz (2003). By assuming that the wage considered to be fair by workers depends on the productivity and thus the economic success of the firm they are working in, we can study the determinants of profits, involuntary unemployment and within-group wage inequality in a unified framework. We use this model to investigate the effects of globalization. In a benchmark case with identical costs of entering domestic and foreign markets, there are gains from trade accompanied by distributional conflicts, which have so far not been accounted for in the literature: A simultaneous increase of average profits and involuntary unemployment as well as a surge in within-group wage inequality.

Suggested Citation

  • Hartmut Egger & Udo Kreickemeier, 2017. "Firm Heterogeneity and the Labor Market Effects of Trade Liberalization," World Scientific Book Chapters, in: International Trade and Labor Markets Welfare, Inequality and Unemployment, chapter 10, pages 265-306, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789813224919_0010
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    JEL classification:

    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General

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