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Selection into Trade and Wage Inequality

  • Thomas Sampson
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    This paper analyzes the impact of trade integration on wage inequality when there is heterogeneity across both workers and firms. By incorporating labor assignment into the heterogeneous firms literature I develop a model in which positive assortative matching between worker skill and firm technology explains the employer size-wage premium and the exporter wage premium. Under trade, fixed export costs cause the selection of high productivity, high skill firms into exporting and an upwards shift in the firm technology distribution. Consequently, the demand for skill and wage inequality increase in all countries, both on aggregate and within the export sector. This result holds both when firms' technologies are determined by a random draw and when technology is endogenous to firm level R&D. With endogenous technology, the increased demand for skill caused by trade liberalization results from technology upgrading by new exporters.

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    File URL: http://cep.lse.ac.uk/pubs/download/dp1152.pdf
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    Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1152.

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    Date of creation: Jun 2012
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    Handle: RePEc:cep:cepdps:dp1152
    Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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    1. Thierry Mayer & Marc J. Melitz & Gianmarco I.P. Ottaviano, 2010. "Market size, competition and the product mix of exporters," Working Paper Research 202, National Bank of Belgium.
    2. Stephen Redding & Oleg Itskhoki & Marc-Andreas Muendler & Elhanan Helpman, 2012. "Trade and Inequality: From Theory to Estimation," 2012 Meeting Papers 135, Society for Economic Dynamics.
    3. Elhanan Helpman & Oleg Itskhoki & Stephen Redding, 2009. "Inequality and Unemployment in a Global Economy," CEP Discussion Papers dp0940, Centre for Economic Performance, LSE.
    4. Pol Antràs & Luis Garicano & Esteban Rossi-Hansberg, 2006. "Offshoring in a Knowledge Economy," The Quarterly Journal of Economics, MIT Press, vol. 121(1), pages 31-77, 02.
    5. Oleg Itskhoki & Elhanan Helpman, 2008. "Labor Market Rigidities, Trade and Unemployment," 2008 Meeting Papers 690, Society for Economic Dynamics.
    6. Mary Amiti & Donald R. Davis, 2012. "Trade, Firms, and Wages: Theory and Evidence," Review of Economic Studies, Oxford University Press, vol. 79(1), pages 1-36.
    7. Philipp Kircher & Jan Eeckhout, 2009. "Identifying Sorting, In Theory," 2009 Meeting Papers 581, Society for Economic Dynamics.
    8. Paula Bustos, 2011. "Trade Liberalization, Exports, and Technology Upgrading: Evidence on the Impact of MERCOSUR on Argentinian Firms," American Economic Review, American Economic Association, vol. 101(1), pages 304-40, February.
    9. Giulia Faggio & Kjell G. Salvanes & John Van Reenen, 2007. "The evolution of inequality in productivity and wages: panel data evidence," LSE Research Online Documents on Economics 4558, London School of Economics and Political Science, LSE Library.
    10. Thorsten Schank & Claus Schnabel & Joachim Wagner, 2006. "Do exporters really pay higher wages? First evidence from German linked employer-employee data," Working Paper Series in Economics 28, University of Lüneburg, Institute of Economics.
    11. 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.
    12. Monte, Ferdinando, 2011. "Skill bias, trade, and wage dispersion," Journal of International Economics, Elsevier, vol. 83(2), pages 202-218, March.
    13. Lentz, Rasmus, 2010. "Sorting by search intensity," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1436-1452, July.
    14. Arnaud Costinot, 2009. "An Elementary Theory of Comparative Advantage," NBER Working Papers 14645, National Bureau of Economic Research, Inc.
    15. Paula Bustos, 2011. "The Impact of Trade Liberalization on Skill Upgrading Evidence from Argentina," Working Papers 559, Barcelona Graduate School of Economics.
    16. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," NBER Working Papers 12365, National Bureau of Economic Research, Inc.
    17. Davidson, Carl & Matusz, Steven J. & Shevchenko, Andrei, 2008. "Globalization and firm level adjustment with imperfect labor markets," Journal of International Economics, Elsevier, vol. 75(2), pages 295-309, July.
    18. Ariel Burstein & Jonathan Vogel, 2010. "Globalization, Technology, and the Skill Premium: A Quantitative Analysis," NBER Working Papers 16459, National Bureau of Economic Research, Inc.
    19. Franziska Ohnsorge & Daniel Trefler, 2007. "Sorting It Out: International Trade with Heterogeneous Workers," Journal of Political Economy, University of Chicago Press, vol. 115(5), pages 868-892, October.
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