Redistribution of Trade Gains in the Presence of Firm and Worker Heterogeneity

Abstract

Trade gains are unequally distributed; in particular, low‐ability workers lose out in terms of wages and employment probability. In this paper, we investigate the impact of redistribution schemes on aggregate and disaggregate variables. To this end, we built a trade model with trade unions, heterogeneous firms and workers. Three redistribution schemes are distinguished: unemployment benefits financed by either a wage tax, a payroll tax or a profit tax. We find that: (i) all three redistribution schemes reduce output per capita; (ii) but the marginal reduction is lowest in the wage tax funding scenario; and (iii) If the profit tax is used, labour demand for low‐ability workers increases.

The Redistribution of Trade Gains When Income Inequality Matters

“…In this paper, we instead measure welfare as a combination of income level and income inequality, as stated before. In this respect, we can analyze the effects of redistribution policies on income inequality; something which is not done by [11]. 4 Similar to us and in contrast to the literature, [21] assumes that income inequality enters negatively in the welfare function.…”

“…As such, we analyze how an empirically-relevant labor market institution influences the performances of the redistribution schemes. 2 Our model builds on the studies by [11,12]. In these papers, the [1] model with heterogeneous firms is extended by worker heterogeneity (i.e., workers are different with respect to their abilities) and unionized labor markets.…”

“…Besides firms and individuals, we introduce the government as the third player into the economy. In accordance to [11], there are four variables that describe the government's actions. On the expenditure 5 The specification of the CES aggregator rules out external scale effects; a well-understood mechanism through which free trade influences aggregate output.…”

“…In these papers, the [1] model with heterogeneous firms is extended by worker heterogeneity (i.e., workers are different with respect to their abilities) and unionized labor markets. 3 Furthermore, [11] incorporates a government sector with the policy instruments mentioned above. In the present paper, we extend their models by implementing a welfare function that takes income inequality into account.…”

“…In the paper by [11], worker and firm heterogeneity are combined with unionized labor markets in order to analyze the effects of different redistribution schemes on welfare. Like this paper, he assumes that the government pays UB financed either by a wage tax, a payroll tax or a profit tax, but welfare is defined in the same way as in the aforementioned studies.…”