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Firm Heterogeneity, Trade, and Wage Inequality

This paper considers a world of two symmetric countries with two factors and two sectors. Outputs of the two sectors are imperfect substitutes and sectors differ in relative factor inten- sity. Each sector contains a continuum of heterogenous firms that produce differentiated goods within their sector. Trade is costly and there are both variable and fixed costs of exporting. The paper shows that under some plausible conditions supported by the data, trade between similar countries can increase the demand for skilled labor, which in turn increases the wage inequality between skilled and unskilled labor. The quantitative analyses suggest that such trade effects can explain up to 12 percent of the increase in the US skill premium.

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File URL: http://www.bus.lsu.edu/economics/papers/pap08_02.pdf
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Paper provided by Department of Economics, Louisiana State University in its series Departmental Working Papers with number 2008-02.

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Handle: RePEc:lsu:lsuwpp:2008-02
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  1. Jaume Ventura, 1997. "Growth and Interdependence," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 57-84.
  2. Cabral, Luís M B & Mata, José, 2001. "On the Evolution of the Firm Size Distribution: Facts and Theory," CEPR Discussion Papers 3045, C.E.P.R. Discussion Papers.
  3. Antonio Ciccone & Giovanni Peri, 2005. "Long-Run Substitutability Between More and Less Educated Workers: Evidence from U.S. States, 1950-1990," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 652-663, November.
  4. Lawrence F. Katz & Kevin M. Murphy, 1992. "Changes in Relative Wages, 1963–1987: Supply and Demand Factors," The Quarterly Journal of Economics, Oxford University Press, vol. 107(1), pages 35-78.
  5. Desjonqueres, Thibaut & Machin, Stephen & Van Reenen, John, 1999. " Another Nail in the Coffin? Or Can the Trade Based Explanation of Changing Skill Structures Be Resurrected?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(4), pages 533-54, December.
  6. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2000. "Plants and Productivity in International Trade," Boston University - Institute for Economic Development 105, Boston University, Institute for Economic Development.
  7. repec:rus:hseeco:122439 is not listed on IDEAS
  8. Acemoglu, Daron, 1997. "Why Do New Technologies Complement Skills? Directed Technical Change and Wage Inequality," CEPR Discussion Papers 1707, C.E.P.R. Discussion Papers.
  9. Bernard, Andrew B. & Redding, Stephen J. & Schott, Peter K., 2004. "Comparative Advantage and Heterogenous Firms," CEPR Discussion Papers 4622, C.E.P.R. Discussion Papers.
  10. Daron Acemoglu, 2002. "Technical Change, Inequality, and the Labor Market," Journal of Economic Literature, American Economic Association, vol. 40(1), pages 7-72, March.
  11. Baldwin, Richard & Robert-Nicoud, Frédéric, 2006. "Trade and Growth with Heterogenous Firms," CEPR Discussion Papers 5563, C.E.P.R. Discussion Papers.
  12. Epifani, Paolo & Gancia, Gino, 2002. "The Skill Bias of World Trade," Seminar Papers 707, Stockholm University, Institute for International Economic Studies.
  13. Per Krusell & Lee E. Ohanian & JosÈ-Victor RÌos-Rull & Giovanni L. Violante, 2000. "Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis," Econometrica, Econometric Society, vol. 68(5), pages 1029-1054, September.
  14. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  15. Wood, Adrian, 1998. "Globalisation and the Rise in Labour Market Inequalities," Economic Journal, Royal Economic Society, vol. 108(450), pages 1463-82, September.
  16. Paul Krugman, 1995. "Growing World Trade: Causes and Consequences," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 327-377.
  17. J. Peter Neary, 2001. "Foreign competition and wage inequality," Working Papers 200102, School of Economics, University College Dublin.
  18. Choi, E. Kwan & Harrigan, James, 2003. "Handbook of International Trade," Staff General Research Papers Archive 11375, Iowa State University, Department of Economics.
  19. Werner Antweiler & Daniel Trefler, 2002. "Increasing Returns and All That: A View from Trade," American Economic Review, American Economic Association, vol. 92(1), pages 93-119, March.
  20. J Bradford Jensen & Andrew B Bernard, 2001. "Why Some Firms Export," Working Papers 01-05, Center for Economic Studies, U.S. Census Bureau.
  21. Daron Acemoglu, 2002. "Directed Technical Change," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 781-809.
  22. Bound, John & Johnson, George, 1992. "Changes in the Structure of Wages in the 1980's: An Evaluation of Alternative Explanations," American Economic Review, American Economic Association, vol. 82(3), pages 371-92, June.
  23. Miguel Székely & Nancy Birdsall & Jere R. Behrman, 2000. "Economics Reform and Wage Differentials in Latin America," Research Department Publications 4235, Inter-American Development Bank, Research Department.
  24. Donald S. Siegel & Catherine J. Morrison Paul, 1999. "Scale Economies and Industry Agglomeration Externalities: A Dynamic Cost Function Approach," American Economic Review, American Economic Association, vol. 89(1), pages 272-290, March.
  25. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
  26. Jere R. Behrman & Nancy Birdsall & Miguel Székely, 2003. "Economic Policy and Wage Differentials in Latin America," Working Papers 29, Center for Global Development.
  27. David Autor & Lawrence Katz & Alan B. Krueger, 1997. "Computing Inequality: Have Computers Changed the Labor Market?," Working Papers 756, Princeton University, Department of Economics, Industrial Relations Section..
  28. Kiminori Matsuyama, 2007. "Beyond Icebergs: Towards a Theory of Biased Globalization," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 237-253.
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