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Firm Dynamics and Residual Inequality in Open Economies

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  • Gabriel Felbermayr
  • Giammario Impullitti
  • Julien Prat

Abstract

Increasing wage inequality between similar workers plays an important role for overall inequality trends in industrialized societies. To analyse this pattern, we incorporate directed labour market search into a dynamic model of international trade with heterogeneous firms and homogeneous workers. Wage inequality across and within firms results from their different hiring needs along their life cycles and the convexity of their adjustment costs. The interaction between wage posting and firms' growth process allows us to explain some recent empirical regularities on firm and labour market dynamics. Fitting the model to capture key features obtained from German linked employer-employee data, we investigate how falling trade costs and institutional reforms interact in shaping firm dynamics and aggregate labor market outcomes. Focusing on the period 1996-2007, we find that neither trade nor key features of the Hartz labour market reforms account for the sharp increase in residual inequality observed in the data. By contrast, inequality is highly responsive to the increase in product market competition triggered by domestic deregulation reforms

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  • Gabriel Felbermayr & Giammario Impullitti & Julien Prat, 2014. "Firm Dynamics and Residual Inequality in Open Economies," Discussion Papers 2014-01, University of Nottingham, GEP.
  • Handle: RePEc:not:notgep:14/01
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    Cited by:

    1. Alessandra Bonfiglioli & Rosario Crinò & Gino Gancia, 2014. "Betting on exports: Trade and endogenous heterogeneity," Economics Working Papers 1460, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2016.
    2. Goel, Manisha, 2017. "Inequality Between and Within Skill Groups: The Curious Case of India," World Development, Elsevier, vol. 93(C), pages 153-176.
    3. Groizard, Jose L. & Ranjan, Priya & Rodriguez-Lopez, Antonio, 2014. "Offshoring and jobs: The myriad channels of influence," European Economic Review, Elsevier, vol. 72(C), pages 221-239.
    4. Daniel Baumgarten & Gabriel Felbermayr & Sybille Lehwald, 2016. "Dissecting between-plant and within-plant wage dispersion - Evidence from Germany," ifo Working Paper Series 216, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    5. Benedikt Heid, 2014. "Essays on International Trade and Development," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 55, November.
    6. Elhanan Helpman & Oleg Itskhoki, "undated". "Trade Liberalization and Labor Market Dynamics with Heterogeneous Firms," Working Paper 199161, Harvard University OpenScholar.

    More about this item

    Keywords

    Wage Inequality; International Trade; Directed Search; Firm Dynamics; Product and Labour Market Regulation.;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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