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Smoothing the adjustment to trade liberalization

Listed author(s):
  • Lechthaler, Wolfgang
  • Mileva, Mariya

We use a dynamic general equilibrium trade model with comparative advantage, heterogeneous firms, heterogeneous workers and endogenous firm entry to analyze economic policy meant to compensate the losers of trade liberalization and reduce the ensuing wage inequality. We consider several instruments of economic policy: a wage tax to redistribute income between skilled and unskilled workers; sector-specific consumption taxes and profit taxes to affect inter-sectoral wage inequality; sector-specific firm entry subsidies, worker sector-migration subsidies and training subsidies to speed up the adjustment process. We find that the re-distributional and efficiency effects of these instruments differ very much. Probably the most potent instrument to reduce the wage inequality after trade liberalization are training subsidies. They increase the supply of skilled workers and thereby reduce the skill premium. The policy also generates inefficiencies because too many workers are trained, but the costs of these inefficiencies are relatively low.

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File URL: https://www.econstor.eu/bitstream/10419/100698/1/794362486.pdf
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Paper provided by Kiel Institute for the World Economy (IfW) in its series Kiel Working Papers with number 1948.

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Date of creation: 2014
Handle: RePEc:zbw:ifwkwp:1948
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  1. Rafael Dix‐Carneiro, 2014. "Trade Liberalization and Labor Market Dynamics," Econometrica, Econometric Society, vol. 82(3), pages 825-885, 05.
  2. Lechthaler, Wolfgang & Mileva, Mariya, 2013. "Trade liberalization and wage inequality: New insights from a dynamic trade model with heterogeneous firms and comparative advantage," Kiel Working Papers 1886, Kiel Institute for the World Economy (IfW).
  3. 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.
  4. Larch, Mario & Lechthaler, Wolfgang, 2009. "Comparative advantage and skill-specific unemployment," Kiel Working Papers 1538, Kiel Institute for the World Economy (IfW).
  5. Fabio Ghironi & Marc Melitz, 2004. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," 2004 Meeting Papers 451, Society for Economic Dynamics.
  6. Andrew B. Bernard & Stephen Redding & Peter K. Schott, 2004. "Comparative advantage and heterogeneous firms," LSE Research Online Documents on Economics 3700, London School of Economics and Political Science, LSE Library.
  7. Pierce, Justin R. & Schott, Peter K., 2013. "The Surprisingly Swift Decline of U.S. Manufacturing Employment," Finance and Economics Discussion Series 2014-4, Board of Governors of the Federal Reserve System (U.S.).
  8. Robert Feenstra, 2003. "Integration Of Trade And Disintegration Of Production In The Global Economy," Working Papers 986, University of California, Davis, Department of Economics.
  9. Lori G. Kletzer, 2004. "Trade-related Job Loss and Wage Insurance: a Synthetic Review," Review of International Economics, Wiley Blackwell, vol. 12(5), pages 724-748, November.
  10. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  11. David H. Autor & David Dorn & Gordon H. Hanson & Jae Song, 2013. "Trade Adjustment: Worker Level Evidence," NBER Working Papers 19226, National Bureau of Economic Research, Inc.
  12. Hartmut Egger & Udo Kreickemeier, 2009. "Redistributing Gains from Globalisation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(4), pages 765-788, December.
  13. Avraham Ebenstein & Ann Harrison & Margaret McMillan & Shannon Phillips, 2009. "Estimating the Impact of Trade and Offshoring on American Workers Using the Current Population Surveys," NBER Working Papers 15107, National Bureau of Economic Research, Inc.
  14. Gathmann, Christina & Schönberg, Uta, 2007. "How General Is Human Capital? A Task-Based Approach," IZA Discussion Papers 3067, Institute for the Study of Labor (IZA).
  15. Carl Davidson & Steven Matusz, 2005. "Trade Liberalization and Compensation," International Trade 0503008, EconWPA.
  16. Rafael Dix-Carneiro, 2010. "Trade Liberalization and Labor Market Dynamics," Working Papers 1273, Princeton University, Department of Economics, Center for Economic Policy Studies..
  17. Greenaway, David & Upward, Richard & Wright, Peter, 2000. "Sectoral Transformation and Labour-Market Flows," Oxford Review of Economic Policy, Oxford University Press, vol. 16(3), pages 57-75, Autumn.
  18. Eckhard Janeba, 2003. "Does Trade Increase Inequality when Skills are Endogenous?," Review of International Economics, Wiley Blackwell, vol. 11(5), pages 885-898, November.
  19. Davidson, Carl & Matusz, Steven J. & Nelson, Douglas R., 2007. "Can compensation save free trade?," Journal of International Economics, Elsevier, vol. 71(1), pages 167-186, March.
  20. Dixit, Avinash & Norman, Victor, 1986. "Gains from trade without lump-sum compensation," Journal of International Economics, Elsevier, vol. 21(1-2), pages 111-122, August.
  21. Frederick Solt, 2009. "Standardizing the World Income Inequality Database," Social Science Quarterly, Southwestern Social Science Association, vol. 90(2), pages 231-242.
  22. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-132, March.
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