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Selection into trade and wage inequality

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  • Sampson, Thomas

Abstract

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.

Suggested Citation

  • Sampson, Thomas, 2012. "Selection into trade and wage inequality," LSE Research Online Documents on Economics 121778, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:121778
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    More about this item

    Keywords

    wage inequality; matching; technology; skills; trade;
    All these keywords.

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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