International Trade and Income Inequality
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.
|Date of creation:||30 Oct 2013|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://fmwww.bc.edu/EC/Email:
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Hartmut Egger & Udo Kreickemeier, 2008.
"Fairness, Trade, and Inequality,"
CESifo Working Paper Series
2344, CESifo Group Munich.
- Caliendo, Lorenzo & Rossi-Hansberg, Esteban, 2011.
"The Impact of Trade on Organization and Productivity,"
CEPR Discussion Papers
8535, C.E.P.R. Discussion Papers.
- Lorenzo Caliendo & Esteban Rossi-Hansberg, 2012. "The Impact of Trade on Organization and Productivity," The Quarterly Journal of Economics, Oxford University Press, vol. 127(3), pages 1393-1467.
- Lorenzo Caliendo & Esteban Rossi-Hansberg, 2011. "The Impact of Trade on Organization and Productivity," NBER Working Papers 17308, National Bureau of Economic Research, Inc.
- Paul Krugman, 1990.
"Increasing Returns and Economic Geography,"
NBER Working Papers
3275, National Bureau of Economic Research, Inc.
- Gene Grossman, 2013.
"Heterogeneous workers and international trade,"
Review of World Economics (Weltwirtschaftliches Archiv),
Springer, vol. 149(2), pages 211-245, June.
- Marc J. Melitz, 2003.
"The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity,"
Econometric Society, vol. 71(6), pages 1695-1725, November.
- Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers 3381, C.E.P.R. Discussion Papers.
- 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.
- Monte, Ferdinando, 2009.
"Skill Bias, Trade, and Wage Dispersion,"
14719, University Library of Munich, Germany.
- Arnaud Costinot & Jonathan Vogel, 2010.
"Matching and Inequality in the World Economy,"
Journal of Political Economy,
University of Chicago Press, vol. 118(4), pages 747-786, 08.
- Jonathan Vogel & Arnaud Costinot, 2008. "Matching and Inequality in the World Economy," 2008 Meeting Papers 879, Society for Economic Dynamics.
- Arnaud Costinot & Jonathan Vogel, 2009. "Matching and Inequality in the World Economy," NBER Working Papers 14672, National Bureau of Economic Research, Inc.
- Emily Blanchard & Gerald Willmann, 2013.
"Trade, Education, and The Shrinking Middle Class,"
Kiel Working Papers
1831, Kiel Institute for the World Economy.
- 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.
When requesting a correction, please mention this item's handle: RePEc:boc:bocoec:849. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F Baum)
If references are entirely missing, you can add them using this form.