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Two-Country Dynamic Model of Trade with Heterogeneous Firms and Comparative Advantage

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  • Wolfgang Lechthaler
  • Mariya Mileva

Abstract

We develop a dynamic trade model with comparative advantage, heterogeneous firms and workers and endogenous firm entry to study wage inequality during the adjustment to trade liberalization. We find that trade liberalization increases wage inequality both in the short run and in the long run. In the short run, wage inequality is mainly driven by inter-sectoral wage inequality, while in the long run, wage inequality is driven by an increase in the skill premium. It is not a good idea to exclude certain sectors from trade liberalization, because that greatly reduces the benefits of trade liberalization, while failing to protect vulnerable workers.

Suggested Citation

  • Wolfgang Lechthaler & Mariya Mileva, 2013. "Two-Country Dynamic Model of Trade with Heterogeneous Firms and Comparative Advantage," WWWforEurope Working Papers series 12, WWWforEurope.
  • Handle: RePEc:feu:wfewop:y:2013:m:7:d:0:i:12
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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:wfo:wstudy:58791 is not listed on IDEAS
    3. repec:feu:wfedel:y:2016:m:2:d:0:i:12 is not listed on IDEAS
    4. repec:wfo:wstudy:47247 is not listed on IDEAS
    5. Karl Aiginger, 2016. "New Dynamics for Europe: Reaping the Benefits of Socio-ecological Transition. Synthesis Report Part I," WWWforEurope Deliverables series 11, WWWforEurope.
    6. Karl Aiginger & Kurt Kratena & Margit Schratzenstaller & Teresa Weiss, 2014. "Moving towards a new growth model," WWWforEurope Deliverables series 3, WWWforEurope.
    7. 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.
    8. repec:wfo:wstudy:47093 is not listed on IDEAS

    More about this item

    Keywords

    Trade liberalization; wage inequality; adjustment dynamics;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion

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