Firm heterogeneity, trade, and wage inequality

Document Type

Article

Publication Date

8-1-2010

Abstract

This paper considers a world of symmetric countries with two factors of production and two sectors. Outputs of the two sectors are imperfect substitutes and the sectors differ in relative factor intensity. Each sector contains a continuum of heterogeneous firms that produce differentiated goods within their sector. Trade is costly and there are both variable and fixed costs of exporting. The paper shows that under some plausible conditions supported by the data, trade between similar countries can increase the demand for skilled labor, which in turn increases the wage inequality between skilled and unskilled labor. The quantitative analysis suggests that such trade effects have played an important role in the increase in the US skill premium. © 2010 Elsevier B.V.

Publication Source (Journal or Book title)

Journal of Economic Dynamics and Control

First Page

1369

Last Page

1379

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