International Trade and Earnings Inequality: A New Factor Content Approach

We develop a new factor content approach to study the impact of trade on inequality. Our analysis generalizes the theoretical results of Deardorff and Staiger (1988) and improves on past empirical implementations of these results. Combined with unique administrative data from Ecuador, our approach yields measures of individual-level exposure to exports and imports, for both capital and labor income, as well as estimates of the incidence of such exposure across the income distribution. We find that international trade raises earnings inequality in Ecuador, especially in the upper-half of the income distribution. However, the drop in inequality experienced by Ecuador over the last decade would have been less pronounced in the absence of trade.