Financial Development and Inequality in the Global Economy

We build a heterogeneous firms model with firm‐specific wages and credit frictions to study the role of financial development for inequality in the global economy. If there are many small (non‐exporting) firms, better access to external funds reduces wage and profit inequality as well as unemployment. In contrast, if there are many large (exporting) firms, financial development might have opposite effects – especially if trade costs are low. In summary, the implications of financial development for inequality depend on the size distribution of firms and on the costs of exporting. Trade liberalization, however, raises inequality unambiguously.     

Labour mobility and the redistributive effects of trade integration

This paper addresses the role of mobility costs in shaping the effects of trade integration on wage inequality and welfare. We present a three-factor, two-sector model in which the production technology exhibits capital-skill complementarity and the cost of moving across sectors differs between unskilled and skilled workers. Results show that trade integration increases aggregate welfare, but it also raises wage inequality, both within and across skill categories. We also model a public re-training program, financed by a proportional tax levied on skilled workers, which reduces the mobility cost of unskilled workers. We show that even if the re-training programme entails some welfare losses, it can reduce both within and between wage inequality, while still making free trade Pareto superior with respect to the no-trade regime.     

Wage inequality, technology, and trade

The recent widening of wage inequality has been attributed by some to skill-biased-technical-change and by others to trade liberalization. This paper examines the two explanations within a unified model and also presents a new modeling of skill-biased-technical-change, where skilled workers replace unskilled ones. As a result technology adoption is endogenous and does not occur in all countries. Hence, wages for both types of workers, trade patterns and also factor productivities in all countries are endogenously determined. The model sheds light on the relationship between technology and trade, on the reasons for global productivity differences and on the causes for the recent rise in wage inequality.     

Globalization and income inequality: A panel data econometric approach for the EU27 countries

This paper investigates the relationship between income inequality and globalization, measured with both trade and financial variables. We estimate an econometric model using appropriate panel data techniques for the EU-27 countries over the period 1995–2009. The analysis is also performed at subgroups of countries within the EU27, such as the Core, Periphery, High Technology, and the New EU Member countries. Overall, the results suggest that trade openness exerts an equalizing effect, while financial globalization through FDI, capital account openness and stock market capitalization has been the driving force of inequality in the EU-27 since 1995. The highest contribution to inequality stems from FDI. Although the trade impact remained robust, disparities were observed in the financial globalization effects within a certain group or among country groups. The recent financial crisis led to a significant rise in inequality only in the EU-periphery and the New Member states. The impact from the other control variables was either minor or insignificant.     

Finance and unemployment: new panel evidence

The effect of credit market imperfections on unemployment is largely investigated in the context of financial crises. This paper shifts the focus toward financial development and structure in a panel of advanced and developing countries. Some important findings emerge. Unemployment increases with financial development and concentration in banking markets but decreases with market orientation, the effect is stronger in magnitudes for young workers than female ones. More rigid market regulation increases unemployment. These findings are particularly pronounced for countries with higher income, better developed financial sectors, lower income inequality, greater trade openness, higher democracy, and common-law systems.     

Entrepreneurs,jobs, and trade

We propose a simple theory of endogenous firm productivity, unemployment, and top income inequality. High-talented individuals choose to become self-employed entrepreneurs and acquire more managerial (human) capital; whereas low-talented individuals become workers and face the prospect of equilibrium unemployment. In a two-country global economy, trade openness raises firm productivity, increases top income inequality, and may reduce welfare in the country exporting the good with lower relative labor-market frictions. Trade openness reduces firm productivity, lowers top income inequality, and necessarily raises welfare in the other country. The effect of trade on unemployment is ambiguous. Unilateral job-creating policies increase welfare in both countries. However, they reduce unemployment and raise top income inequality in the policy-active country; and reduce top income inequality while increasing unemployment in the policy-passive country.     

贸易开放与性别工资差距

本文在不完全竞争市场环境下,建立贸易开放和性别工资差距的数理模型。在理论分析的基础之上,本文运用2002年中国家庭住户收入项目调查数据(CHIP)进行实证分析。在控制了年龄、婚姻状况和受教育年限等个体层面和人均GDP等城市层面的工资影响因素情形下,得出结论:贸易开放在总体上拉大了性别工资差距;贸易开放缩小了高技能劳动力的性别工资差距,拉大了低技能劳动力的性别工资差距。从某种意义上说,女性弱势群体更容易被排除在贸易开放的利益之外。因此,提高女性的受教育程度,并为之提供相应的制度保障具有尤为重要的政策含义。     

Income inequality and credit expansion in post-communist countries

There is an on-going debate on the antecedents and consequences of income inequality. Recent studies find that income inequality was a cause of the recent financial crisis. However, the findings on the inequality–indebtedness relationship are mixed and based on analyses of developed countries. The aim of this research is to test how income inequality influences borrowing in post-communist countries, whose financial markets are not very developed, which has important implications for income inequality. Therefore, we include financial system development in the analysis. We base our analysis on state-level panel data and find that income inequality will increase indebtedness in the private sector. However, these results are model and region specific. To preclude higher income inequality and the emergence of a financial crisis, policies should be directed towards improving the role of financial intermediaries and stock markets.     

A Schumpeterian North–South Growth Model of Trade and Wage Inequality*

The paper presents a dynamic general‐equilibrium model of interindustry North–South trade that is used to analyze the effects of trade liberalization on the Northern wage distribution. Both countries have a low‐tech sector where consumer goods of constant quality are produced by use of unskilled labor. The North also has a high‐tech sector that employs skilled labor and features a quality‐ladder model structure with endogenous growth. Both innovation and skill acquisition rates are endogenously determined. In a balanced trade equilibrium, it is found that Southern‐originated (Northern‐originated) trade liberalization leads to an increase (decrease) in Northern wage inequality both between skilled and unskilled workers and within the group of skilled workers. The endogenous change in the Southern terms of trade determines the direction of change in unskilled wages in both the North and the South.     

NO CREDIT,NO GAIN: TRADE LIBERALIZATION DYNAMICS,PRODUCTION INPUTS,AND FINANCIAL DEVELOPMENT

We study the role of financial development on the aggregate implications of reducing import tariffs on capital and intermediate inputs. We document empirically that financially underdeveloped economies feature a slower aggregate response following trade liberalization. To quantify these effects, we set up a general equilibrium model with heterogeneous firms subject to collateral constraints and estimate it using Colombian plant-level data. We find that low financial development substantially limited the gains from trade liberalization in Colombia in the early 1990s. More broadly, we find that low financial development substantially limits both the aggregate and welfare gains from tariff reductions.     

Finance and income inequality in Kazakhstan: evidence since transition with policy suggestions

Kazakhstan gained independence in 1990 and has undergone significant changes in economic, social and trade conditions since then. We analyse the effects of financial development on income inequality in Kazakhstan, incorporating economic growth, foreign investment, education and the role of democracy as the drivers. We establish that income inequality in Kazakhstan is impaired by financial development. In summary, we send three messages for policy purposes. First, strengthening financial sector is necessary to close the gap between ‘haves and have-nots’. Second, attracting FDI beyond the hydrocarbon sector is necessary to alleviate inequality. Finally, adaptation of education system to the new social and economic environment would help in improving income distribution.     

Skills,Tasks and the Scarcity of Talent in a Global Economy

The scarcity of talent is a tremendous challenge for firms in the globalized world. This paper investigates the role of labor market imperfection in open economies for the usage of talent in the production process of firms. For this purpose, I set up a heterogeneous firms model, where production consists of a continuum of tasks that differ in complexity. Firms hire low‐skilled and high‐skilled workers to perform these tasks. How firms assign workers to tasks depends on factor prices for the two skill types and the productivity advantage of high‐skilled workers in the performance of complex tasks. I study the firms’ assignment problem under two labor market regimes, which capture the polar cases of fully flexible wages and a binding minimum wage for low‐skilled workers. Since the minimum wage lowers the skill premium, it increases the range of tasks performed by high‐skilled workers, which enhances the stock of knowledge within firms to solve complex tasks and reduces the mass of active firms. In a setting with fully flexible wages trade does not affect the firm‐internal assignment of workers to tasks. On the contrary, if low‐skilled wages are fixed by a minimum wage, trade renders high‐skilled workers a scarce resource and reduces the range of tasks performed by this skill type with negative consequences for the human capital stock within firms. In this case, trade leads to higher per‐capita income for both skill types and thus to higher welfare in the open than in the closed economy, whereas – somewhat counter‐intuitive – inequality between the two skill types decreases, as more low‐skilled workers find employment in the production process.     

Financial development,control of corruption and income inequality

This paper examines the effect of financial development and control of corruption on income inequality in 21 Sub-Saharan African (SSA) countries over the period 1985–2011 using the pooled mean group (PMG) estimator. The empirical results show that financial development measures have positive impact on income inequality, which suggest that financial development increases income inequality. On the other hand, the coefficients of control of corruption are negative and significantly related to income inequality which implies that corruption control reduces income inequality. Further, the interaction of the financial development and the control of corruption is found to be negatively and significantly related to income inequality. Equally the interaction of the financial development and transparency index (an alternate measure of corruptibility) is found to be negatively and significantly related to income inequality. These findings suggest that the control of corruption and transparency in governance are crucial in reducing income inequality in SSA.     

Rational underdevelopment: regional economic disparities under the Heckscher-Ohlin Theorem

This paper analyzes how differences in regional development arise through technological variations and changes. Previous Ricardian-model-based considerations of this phenomenon, known as rational underdevelopment, have ignored migration, elasticities, multidimensional factors and inputs. This study thus re-examines rational underdevelopment in light of the Heckscher-Ohlin Theorem, considering two regions, with two sectors, in two periods. The regions have different factor and technology endowments. The first region has a technology sector, and the second is a technology laggard. Once a new technology that can potentially benefit both regions is introduced, the technology-endowed region offers financial transfers to the technologically lagging region. This equalizes regional incomes but also reduces the possibility that the laggard will adopt the new technology and decrease its developmental disadvantage. We also discuss the influence of mobile factors, which reduce regional inequality. The results show that rational underdevelopment extends beyond wage subsidies to mobile factors and capital. The analysis has implications for economic policies aimed at reducing inter-regional inequality.     

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.     

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.     

Financial market development and trade openness: evidence from emerging economies

International trade is said to be the engine of economic growth. Despite an enormous effort to explain this phenomenon, the relationship between financial market development and trade openness and integration into the world economy is still an enigma. This article investigates the relationship between financial market development and trade openness. To do this, we develop a long-run and short-run model (a bounds testing approach to cointegration) for 18 emerging economies over the period 1980 to 2011. Estimates from all models show that financial market development, including both the stock market and the banking sector, has significant effect on trade openness in both short-run and long-run phenomena in the majority of countries. Despite many similarities among emerging economies, additional evidence suggests that the link between either stock market development or banking sector development with trade openness works via each country’s specific structure.     

Patterns of Skill Premia

This paper develops a model to analyse how skill premia differ over time and across countries, and uses this model to study the impact of international trade on wage inequality. Skill premia are determined by technology, the relative supply of skills, and trade. Technology is itself endogenous, and responds to profit incentives. An increase in the relative supply of skills, holding technology constant, reduces the skill premium. But an increase in the supply of skills over time also induces a change in technology, increasing the demand for skills. The most important result of the paper is that increased international trade induces skill-biased technical change. As a result, trade opening can cause a rise in inequality both in the U.S. and the less developed countries, and thanks to the induced skill-biased technical change, this can happen without a rise in the relative prices of skill-intensive goods in the U.S., which is the usual intervening mechanism in the standard trade models.     

Indra-Industry Trade,Endogenous Technical Change,Wage Inequality and Welfare

By using alternative intra-industry trade models (1. New goods cannot be introduced into the economy; 2. The possibility for a set of capital goods available in the economy to vary; the models consider the existence of intersectoral linkages), I show by means of Applied General Equilibrium (AGE) analysis that trade rises wage inequality between skilled and unskilled workers; but the impact on wage inequality is far larger, when countries are assumed to exchange differentiated capital goods. The latter result has been obtained by using an imperfect competitive model, which embodies a sector bias technological change that arises from trade. In addition, the gains from trade, insignificant under the standard trade hypotheses, are extraordinarily large when endogenous technological change is taken into account. The main policy conclusion is that if policy makers of flexible wage economies introduce trade barriers to reduce wage inequality, these protective measures, by affecting the diffusion of technology, would cause a large welfare loss. [D58, f12, F43, J3, O3]     

Trade and inequality in a directed search model with firm and worker heterogeneity

This paper integrates the insight that exporting firms are typically more productive and employ higher‐skilled workers into a directed search model of the labour market. The model generates a skill premium as well as residual wage inequality among identical workers. A trade liberalization increases the skill premium and likely increases residual inequality among high‐skilled workers. The calibrated model generates results consistent with the prior literature examining the effect of the Canada‐US Free Trade Agreement on the Canadian labour market: a significant decrease in employment in manufacturing, but only a small change in unemployment and wages.