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The Effects of Globalization on Wage Inequality: New Insights from a Dynamic Trade Model with Heterogeneous Firms

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  • Mariya Mileva
  • Sebastian Braun
  • Wolfgang Lechthaler

Abstract

Fears of increasing inequality play a dominant role in current debates on how globalization is affecting our economies. After a brief review of recent trends in wage inequality, this policy paper presents new insights on the dynamic effect of trade liberalization on wage inequality. In the context of a dynamic trade model with costly labour mobility (Lechthaler and Mileva, 2013), we show that the effect of trade liberalization on wage inequality depends on i) the time horizon considered, ii) the degree of worker mobility, and iii) the degree of trade liberalization (partial/full). In the short-run, observed increases in wage inequality are driven by an increase in inter-sectoral wage inequality, while in the long run, wage inequality is driven by an increase in the skill premium.

Suggested Citation

  • Mariya Mileva & Sebastian Braun & Wolfgang Lechthaler, 2013. "The Effects of Globalization on Wage Inequality: New Insights from a Dynamic Trade Model with Heterogeneous Firms," WWWforEurope Working Papers series 49, WWWforEurope.
  • Handle: RePEc:feu:wfewop:y:2013:m:12:d:0:i:49
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    References listed on IDEAS

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    Cited by:

    1. repec:feu:wfedel:y:2016:m:2:d:0:i:11 is not listed on IDEAS
    2. repec:feu:wfedel:y:2016:m:2:d:0:i:12 is not listed on IDEAS
    3. Karl Aiginger, 2016. "New Dynamics for Europe: Reaping the Benefits of Socio-ecological Transition. Synthesis Report Part I," WWWforEurope Deliverables series 11, WWWforEurope.
    4. Zareh Asatryan & Sebastian Braun & Wolfgang Lechthaler & Mariya Mileva & Catia Montagna, 2014. "Compensating the losers of free trade," WWWforEurope Working Papers series 63, WWWforEurope.

    More about this item

    Keywords

    Challenges for welfare system; globalisation; labour markets; macroeconomic disequilibria;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General

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