Globalization,product differentiation,and wage inequality

Abstract This paper develops a two‐country, general equilibrium model of oligopoly in which the degree of horizontal product differentiation is endogenously determined by firms’ strategic investments in product innovation. Consumers seek variety and product innovation is more skill intensive than production. Stronger import competition increases innovation incentives, and thereby the relative demand for skill. An intra‐industry trade expansion following trade liberalization can therefore increase wage inequality between skilled and unskilled workers. As long as some industries remain shielded from international competition, the welfare implications of globalization are found to be generally ambiguous.     

Trade between symmetric countries,heterogeneous firms,and the skill premium

Abstract This paper examines the effects of trade liberalization between symmetric countries on the skill premium. I introduce skilled and unskilled labour in a model of trade with heterogeneous firms à la Melitz (2003) and assume a production technology such that more productive firms are more skill intensive. I show that the effects of trade liberalization on wage inequality crucially depend on the type of trade costs considered and on their initial size. While fixed costs of trade have a potentially non‐monotonic effect on the skill premium, a drop in variable trade costs unambiguously and substantially raises wage inequality.     

Trade,technology, and China's rising skill demand1

China has experienced rising wage inequality due to rising relative demand for skilled labour. In this paper, we use a sample of 1,500 firms to investigate the impact of trade and technology on China's rising skill demand. We find that export expansion had a negative direct effect (Heckscher–Ohlin type) and a positive indirect effect (export‐induced skill‐biased technical change) on skill demand; the net effect was found positive and accounted for 5 percent of rising skill demand of the sample firms. We find that technical change in Chinese firms was on average skill‐neutral, but majority foreign‐owned firms experienced skill‐biased technical progress that accounted for 22 percent of the rising skill demand of the sample firms.     

Intra‐industry Trade Liberalization: Why Skilled Workers are More Likely to Support Free Trade

This paper presents a theoretical model and empirical analysis that connects the prevalence of intra‐industry trade with increased wage inequality from trade liberalization in both skilled and unskilled labor abundant countries. The Stolper–Samuelson effect is incorporated into an intra‐industry trade liberalization (intra‐ITL) hypothesis where skilled labor opposes protectionism in all countries engaged in intra‐industry trade because skilled workers gain at the expense of unskilled workers from multilateral trade liberalization within the skill‐intensive sector. We examine empirical evidence on whether skilled individuals are more supportive of trade liberalization than unskilled individuals across 31 countries with different levels of intra‐industry trade and skill endowments. We find that the extent to which countries engage in intra‐industry trade in high‐tech commodities is strongly linked with the intensity of opposition to protection by skilled labor. Regression results strongly support our hypothesis that skilled workers, almost everywhere, are more likely to support free trade.     

Factor price overshooting with trade liberalization: theory and evidence

This paper develops an intra‐industry trade model with skilled and unskilled labor as factors of production, endogenous accumulation of skilled labor and firm heterogeneity in factor intensities to examine the effect of trade reforms on factor prices. Since exporters are more skill intensive than non–exporters, a decrease in trade barriers initially increases wage inequality between skilled and unskilled workers, as a result of an increase in the relative demand for skilled labor. Over time, however, as agents respond to the change in relative wages by investing in skilled labor, the relative wage of skilled labor decreases. Evidence from Chilean plant–level data supports the idea of factor price overshooting with trade liberalization.     

Low-wage import competition and populist backlash: The case of Italy

This paper studies empirically the role of trade globalization in shifting the electoral base towards populism. We proxy the trade shock with swiftly rising import competition from China and compare voting patterns at the national parliamentary elections from 1992 to 2013 in about 8000 Italian municipalities differently exposed to the trade shock. We instrument import competition from China with Chinese export flows to other high-income countries and estimate the model in first differences. Our results indicate that trade globalization increases support for populist parties, as well as invalid votes and abstentionism. To rationalize these findings, we offer evidence that import competition worsens local labor market conditions – higher unemployment, lower income and durable consumption – and increases inequality. Finally, we point out that local public expenditure may play a role in mitigating the political consequences of the trade shock, arguably because it alleviates economic distress.     

Unionization,international integration,and selection

Abstract We study how unionization affects competitive selection between heterogeneous firms when wage negotiations can occur at the firm or at the profit‐centre level. With productivity specific wages, an increase in union power has: (i) a selection‐softening; (ii) a counter‐competitive; (iii) a wage‐inequality; and (iv) a variety effect. In a two‐country asymmetric setting, stronger unions soften competition for domestic firms and toughen it for exporters. With profit‐centre bargaining, we show how trade liberalization can affect wage inequality among identical workers both across firms (via its effects on competitive selection) and within firms (via wage discrimination across destination markets).     

Does Trade Increase Inequality when Skills are Endogenous?

The paper explores the role of government policies in a situation where the wage gap between high‐skilled and low‐skilled workers is widening owing to increasing foreign competition in low‐skilled intensive goods. A two‐period, three‐sector general‐equilibrium model of a small open economy is developed in which individuals choose whether to invest in skills or not. The government influences individual decision‐making through its tax system. The paper shows that increasing import competition or lowering taxes on skilled workers widens inequality when the skill distribution is exogenous (the direct effect), but often the opposite occurs through the indirect effect, that is through the additional incentive to become skilled. Numerical results indicate that there exists a nonmonotonic relationship between the terms of trade and inequality. The indirect effect tends to dominate the direct effect when import competition is intense, and vice versa.     

Another Nail in the Coffin? Or Can the Trade Based Explanation of Changing Skill Structures Be Resurrected?

The skill structure of wages and employment has altered markedly in recent years. In some countries (most notably the UK and the US) wage inequality has risen sharply and in most countries relative demand has shifted unfavourably against the less skilled. In this paper we reassess the evidence that rising international competition from developing countries is the crucial factor underpinning these changes. Our results, based on newly constructed internationally comparable industry data, find little support for the predictions of the basic Heckscher-Ohlin (H-O) trade model.
JEL classification: J 31; F 14     

Goods market responses to trade shocks and trade and wages decompositions

Abstract.  Trade and wages literature asks whether trade or technology has been the major factor behind increases in wage inequality in OECD countries since the 1980s. In this literature, little attention has been paid to how goods market responses to trade shocks affect conclusions. Using an Armington heterogeneous goods trade model we capture demand side effects, and show how trade shocks affecting the price of unskilled‐intensive importable goods can be absorbed on the demand side of goods markets, with little or no impact on relative wage rates. No wage impact occurs if the elasticity of substitution in preferences between imports and import substitutes is one. As this elasticity increases, trade plays an ever larger role in explaining wage inequality changes, and as the elasticity goes below one the sign of the effect changes. We present some results of general equilibrium decompositions of total wage change into trade and technology components using UK data. We suggest that since many import demand elasticity estimates are in the neighbourhood of one, there is a prima facie case that goods market considerations further lower the significance of trade as an explanation of recent trends in OECD wage inequality beyond that claimed in the literature.     

Trade, technology, and unemployment: the role of endogenous skill formation

Abstract .  This paper analyses trade in an asymmetric  2 × 2 × 2  world, where the two countries ('Europe' and 'America') differ in their preferences towards wage inequality. Fair wage considerations compress wage differentials in both countries. European workers are more averse to wage inequality, and Europe is characterized by lower wage differentials and higher unemployment. Allowing for endogenous skill formation, the effects of a globalization shock, global technological change, and a change in the educational capital stock on skill premia and employment levels are derived. In contrast to a model with exogenous factor supplies, international wage and unemployment differentials are affected by global shocks.     

Increased sorting and wage inequality in the Czech Republic

This paper makes use of a linked employer–employee dataset to examine the evolution of wage inequality in the Czech Republic during 1998–2006. We find evidence of slightly increasing returns to human capital and diminishing gender inequality and document sharp increases in both within‐firm and between‐firm inequality. We investigate several hypotheses to explain these patterns: increased domestic and international competition, decentralized wage bargaining, skill‐biased technological change and a changing educational composition of the workforce. Domestic competition is found to lower within‐firm inequality whereas we find no evidence that increased international trade at the industry level is associated with higher between‐ or within‐firm wage inequality. The key factors driving the observed increase in wage inequality are increased educational sorting and the inflow of foreign firms to the Czech Republic.     

Who Trades with Whom? Exploring the Links between Firms' International Activities,Skills, and Wages

Using firm‐level data on the Italian manufacturing industry, we examine how trade activities are related to workforce composition and wages. We contribute to empirical research on these issues in three ways. First, we provide new evidence that is consistent with multi‐attribute models on firm heterogeneity and trade. We show that even after controlling for various company characteristics, including size and capital intensity, exporters still pay higher wages and employ more skilled workers than nonexporters. Second, we consider engagement in international transactions, either by means of exports, imports, or a combination of the two. We show that failing to control for importing activities may bias upward export premia. Third, we look at how the wage and the employment structures of trading firms change with the country of destination and origin of trade flows. We find that wage and skill premia are influenced by the characteristics of partner countries.     

A model of firm heterogeneity in factor intensities and international trade

Empirical evidence suggests that exporters are, in addition to being more productive, significantly more skilled‐labour intensive than non‐exporters. In a setting that captures both these features, we show that the firm selection induced by trade liberalization works along two dimensions. First, export growth increases competition for skilled labour. This leads to the exit of some of the skilled‐labour intensive firms, while benefitting unskilled‐labour intensive ones. Second, within the group of firms with the same factor intensities, the reallocation of factors is towards the exporters. We show that the increased competition for skilled labour dampens the positive effect of trade liberalization on sector‐wide TFP and real income.     

Wage Inequality,Increased Competition,and Trade Liberalization: Short Run vs Long Run

This paper examines the impact of increased competition and trade liberalization on skilled–unskilled wage inequality in the short run as well as the long run. It is shown that an increase in the number of firms in the producer services sector increases wage inequality in the short run even if the income shares of capital in the industrial and agricultural sectors were identical. A decrease in the services sector's fixed cost decreases wage inequality in the short run if the income share of capital in the agricultural sector is relatively large. Owing to the presence of external economies, a decrease in the services sector's fixed cost increases wage inequality in the long run. A decrease in import duty on the agricultural good increases wage inequality in the short as well as the long run but its effect in the long run is stronger due to the presence of external economies in the industrial sector.     

Technology Adoption,Export Status,and Skill Upgrading: Theory and Evidence

This paper develops a model of trade that features heterogeneous firms, technology choice and different types of skilled labor in a general equilibrium framework to explain within‐industry increase in the relative demand for skilled workers. Its main contribution is to investigate the impact of firms' export and technology choice decisions on skill upgrading. Only firms in the upper range of the productivity distribution produce for the foreign market using high‐technology. Since this technology is skilled‐biased, exporters that resort to modern technologies are more skill intensive. Empirical evidence is also provided to support the model's main predictions using plant‐level panel data from Chile's manufacturing sector (1990–1999).     

Redistributing Gains from Globalisation*

This paper analyses the effects of redistribution in a model of international trade with heterogeneous firms in which a fair‐wage effort mechanism leads to firm‐specific wage payments and involuntary unemployment. The redistribution scheme is financed by profit taxes and gives the same absolute lump‐sum transfer to all workers. International trade increases aggregate income and income inequality, ceteris paribus. If, however, trade is accompanied by a suitably chosen increase in the profit tax rate, it is possible to achieve higher aggregate income and a more equal income distribution than in autarky, provided that the share of exporters is sufficiently high.     

Intra‐firm trade,exporting, importing,and firm performance

Abstract This paper examines firm heterogeneity in terms of size, wages, capital intensity, and productivity between domestic and foreign‐owned firms that engage in intra‐firm trade, firms that export and import, firms that import only, and firms that export only. As previously documented, heterogeneity between different groups of trading firms is substantial. Taking into account intra‐firm trade in addition to exporting and importing yields new insights into the productivity advantage previously established for exporting firms. The results presented here show that this premium accrues only to exporters that also import and to exporters that also engage in intra‐firm trade, but not to firms that export only. Using simultaneous quantile regressions, the paper illustrates that heterogeneity within different groups of trading firm is equally large. Some of this within‐group heterogeneity can be attributed to differences in trading partners.     

A Regional Analysis of the Impact of Trade and Foreign Direct Investment on Wages in Mexico, 1984–2000

The conventional Heckscher–Ohlin model of trade predicts an equalizing effect of trade on wages in developing countries abundant in less‐skilled labor. Contrary to these predictions, skill premiums and skill demand increased in Mexico following trade liberalization. “New” trade theories have offered several channels through which trade can increase relative wages and demand for skilled workers. One such channel is foreign direct investment and outsourcing. Using the Mexican Household Income and Expenditure Survey (ENIGH) covering 1984–2000, the author examines the relationship between the demand for skill and maquiladora employment across regions and states. In contrast to previous studies based on manufacturing data for the 1980s, little evidence is found that growth in maquiladora employment is positively related to the increase in relative wages or wage‐bill share of more educated workers.