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Smoothing the adjustment to trade liberalization

Listed author(s):
  • Wolfgang Lechthaler
  • Mariya Mileva

We use a dynamic general equilibrium trade model with comparative advantage, heterogeneous firms, heterogeneous workers and endogenous firm entry to analyze economic policy to compensate the losers of trade liberalization and to reduce the ensuing wage inequality. We consider several instruments of economic policy: a wage tax to redistribute income between skilled and unskilled workers; sector-specific consumption taxes and profit taxes to affect inter-sectoral wage inequality; sector-specific firm entry subsidies, worker sector-migration subsidies and training subsidies to speed up the adjustment process. We find that the re-distributional and efficiency effects of these instruments differ very much. Probably the most potent tool to reduce the wage inequality after trade liberalization are training subsidies. Although the policy also generates inefficiencies because too many workers are trained, the costs of these inefficiencies are relatively low.

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Paper provided by WWWforEurope in its series WWWforEurope Working Papers series with number 61.

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Length: 54
Date of creation: May 2014
Publication status: published
Handle: RePEc:feu:wfewop:y:2014:m:5:d:0:i:61
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Order Information: Postal: WWWforEurope Project Office Austrian Institute of Economic Research Arsenal Objekt 20 A-1030 Vienna
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