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Trade liberalization and wage inequality: new insights from a dynamic trade model with heterogeneous firms and comparative advantage

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  • Lechthaler, Wolfgang
  • Mileva, Mariya

Abstract

We develop a dynamic general equilibrium trade model with comparative advantage, heterogeneous firms, heterogeneous workers and endogenous firm entry to study wage inequality during the adjustment after trade liberalization and potential policy responses to reduce wage inequality. In the short run, inter-sectoral wage inequality is high but then recedes as more and more workers move to the expanding exporting sector. The skill premium does not change much in the short run but increases substantially in the medium and long run. Training subsidies are more powerful than sector-migration subsidies in reducing the wage inequality induced by trade liberalization.

Suggested Citation

  • Lechthaler, Wolfgang & Mileva, Mariya, 2019. "Trade liberalization and wage inequality: new insights from a dynamic trade model with heterogeneous firms and comparative advantage," Open Access Publications from Kiel Institute for the World Economy 266159, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkie:266159
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    Cited by:

    1. Marta Marson & Donatella Saccone & Elena Vallino, 2023. "Total trade, cereals trade and undernourishment: new empirical evidence for developing countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 159(2), pages 299-332, May.
    2. Karl Aiginger, 2016. "New Dynamics for Europe: Reaping the Benefits of Socio-ecological Transition – Part I: Synthesis. WWWforEurope Deliverable No. 11," WIFO Studies, WIFO, number 58791, August.
    3. Zareh Asatryan & Sebastian Braun & Wolfgang Lechthaler & Mariya Mileva & Catia Montagna, 2014. "Compensating the Losers of Free Trade. WWWforEurope Working Paper No. 63," WIFO Studies, WIFO, number 47260, August.
    4. Jiang, Zhe (Jasmine), 2023. "‘Multinational Firms’ Sourcing Decisions and Wage Inequality: A Dynamic Analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 146(C).
    5. Juthathip Jongwanich, 2024. "Trade liberalisation and the wage premium: evidence from Thai manufacturing," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 38(1), pages 3-33, May.
    6. Wolfgang Lechthaler & Mariya Mileva, 2021. "Smoothing the adjustment to trade liberalization," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 48(4), pages 903-946, November.
    7. Lechthaler, Wolfgang & Mileva, Mariya, 2024. "Trade liberalization, wage inequality, and monetary policy," Journal of International Money and Finance, Elsevier, vol. 143(C).
    8. Lechthaler, Wolfgang & Mileva, Mariya, 2016. "Inter-industry trade and business cycle dynamics," Kiel Working Papers 2041, Kiel Institute for the World Economy.
    9. Wolfgang Lechthaler & Mariya Mileva, 2021. "The Dynamic And Distributional Aspects Of Import Tariffs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(1), pages 199-241, February.
    10. Jiang, Zhe (Jasmine), 2024. "Offshoring, firm-level adjustment and labor market outcomes," Journal of Economic Dynamics and Control, Elsevier, vol. 166(C).
    11. Wolfgang Lechthaler & Mariya Mileva, 2014. "Smoothing the Adjustment to Trade Liberalisation. WWWforEurope Working Paper No. 61," WIFO Studies, WIFO, number 47248, August.

    More about this item

    Keywords

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    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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