Inequality and Unemployment in a Global Economy

Abstract

This paper develops a new framework for examining the distributional consequences of trade liberalization that is consistent with increasing inequality in every country, growth in residual wage inequality, rising unemployment, and reallocation within and between industries. While the opening of trade yields welfare gains, unemployment and inequality within sectors are higher in the trade equilibrium than in the closed economy. In the open economy changes in trade openness have nonmonotonic effects on unemployment and inequality within sectors. As aggregate unemployment and inequality have within-and between-sector components, changes in sector composition following the opening of trade complicate its impact on aggregate unemployment and inequality. However, when countries are nearly symmetric, the sectoral composition effects reinforce the within-sector effects, and both aggregate inequality and aggregate unemployment rise with trade liberalization.

Wage inequality, technology and trade: 21st century evidence

“…These effects are not only statistically significant, they matter effects of trade liberalization on inequality (e.g. Helpman, Itskhoki and Redding, 2010). See also Thoenig and Verdier (2003) and Acemoglu (2002).…”

Skill bias, trade, and wage dispersion

“…Finally, their model does not capture the well-documented selection of subsets of …rms into the export market, and only compares autarky and free-trade equilibria when North-North trade is driven by di¤erences in factor diversity 8 across countries. This paper is also related to Helpman, Itskhoki and Redding (2008). Their paper focuses on the relation between trade, search and screening costs, and unemployment.…”

Trade liberalization and the wage gap: the role of vertical linkages and fixed costs

“…Section 5 concludes. 13 Specifically, this stream of the literature, together with other more recent approach to comparative advantage and inequality, is surveyed in Harrison et al (2011) and includes the work by Egger and Kreickemeier (2009) who assume that workers care about receiving fair wages, Davis and Harrigan (2011) with efficiency wages, and by Helpman et al (2010) with search frictions and workers assumed to be heterogeneous in some unobservable ability (we refer the interested reader to the survey by Harrison et al (2011) for the details on the mechanisms through which trade can increase wage inequalities in these frameworks). In addition, also Montagna and Nocco (2013) study how the interaction between the degree of centralization of wage bargaining and intra-industry competitive selection affects the emergence of within-group wage inequality accounting for the emergence of both inter-firm and intrafirm wage dispersion.…”