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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. We find that trade liberalization increases wage inequality both in the short run and in the long run. In the short run, wage inequality is mainly driven by an increase in inter-sectoral wage inequality, while in the medium to long run, wage inequality is driven by an increase in the skill premium. Incorporating worker training in the model considerably reduces the effects of trade liberalization on wage inequality. The effects on wage inequality are much more adverse when trade liberalization is unilateral instead of bilateral or restricted to specific sectors instead of including all sectors.

Suggested Citation

  • Lechthaler, Wolfgang & Mileva, Mariya, 2014. "Trade liberalization and wage inequality: New insights from a dynamic trade model with heterogeneous firms and comparative advantage," Kiel Working Papers 1886 [rev.], Kiel Institute for the World Economy (IfW).
  • Handle: RePEc:zbw:ifwkwp:1886r
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Lechthaler, Wolfgang & Mileva, Mariya, 2016. "Inter-industry trade and business cycle dynamics," Kiel Working Papers 2041, Kiel Institute for the World Economy (IfW).
    2. repec:wfo:wstudy:58791 is not listed on IDEAS
    3. Wolfgang Lechthaler & Mariya Mileva, 2014. "Smoothing the adjustment to trade liberalization," WWWforEurope Working Papers series 61, WWWforEurope.
    4. repec:wfo:wstudy:47248 is not listed on IDEAS

    More about this item

    Keywords

    trade liberalization; wage inequality; adjustment dynamics;

    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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