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International Trade and Income Inequality

  • Taiji Furusawa

    (Hitotsubashi University)

  • Hideo Konishi

    ()

    (Boston College)

We propose a theory that explains why international trade can widen a wage gap between top income earners and others and cause job polarization. In the basic model, we consider two symmetric countries in which individuals with different abilities work either as knowledge workers, who develop products produced in a differentiated-good sector, or as production workers, who engage in actual production processes. In equilibrium, ex ante symmetric firms post different wages for knowledge workers and hence attract workers with different abilities, creating the firm heterogeneity in product quality. International trade will benefit firms that produce high-quality products and harm firms that produce low-quality products. The relative wage gap between individuals with high ability and those with low ability expands as a result. Indeed, we show that international trade increases the real wages for those with lowest and highest abilities but decreases the real wages for those with intermediate abilities. We also extend the basic model to the one with asymmetric countries and show that income inequality worsens in the smaller or talent-scarce country while it lessens in the talent-abundant country as a result of international trade.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 849.

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Date of creation: 30 Oct 2013
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Handle: RePEc:boc:bocoec:849
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  1. Emily Blanchard & Gerald Willmann, 2013. "Trade, Education, and The Shrinking Middle Class," Kiel Working Papers 1831, Kiel Institute for the World Economy.
  2. Grossman, Gene, 2013. "Heterogeneous Workers and International Trade," CEPR Discussion Papers 9341, C.E.P.R. Discussion Papers.
  3. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  4. Arnaud Costinot & Jonathan Vogel, 2009. "Matching and Inequality in the World Economy," NBER Working Papers 14672, National Bureau of Economic Research, Inc.
  5. Monte, Ferdinando, 2009. "Skill Bias, Trade, and Wage Dispersion," MPRA Paper 14719, University Library of Munich, Germany.
  6. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  7. Egger, Hartmut & Kreickemeier, Udo, 2012. "Fairness, trade, and inequality," Journal of International Economics, Elsevier, vol. 86(2), pages 184-196.
  8. Caliendo, Lorenzo & Rossi-Hansberg, Esteban, 2011. "The Impact of Trade on Organization and Productivity," CEPR Discussion Papers 8535, C.E.P.R. Discussion Papers.
  9. David H. Autor & Lawrence F. Katz & Melissa S. Kearney, 2008. "Trends in U.S. Wage Inequality: Revising the Revisionists," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 300-323, May.
  10. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
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