Trade and inequality: From theory to estimation

Elhanan Helpman, Oleg Itskhoki, Marc Andreas Muendler, Stephen J. Redding

Research output: Contribution to journalArticlepeer-review

167 Scopus citations

Abstract

While neoclassical theory emphasizes the impact of trade on wage inequality between occupations and sectors, more recent theories of firm heterogeneity point to the impact of trade on wage dispersion within occupations and sectors. Using linked employer-employee data for Brazil, we show that much of overall wage inequality arises within sector-occupations and for workers with similar observable characteristics; this within component is driven by wage dispersion between firms; and wage dispersion between firms is related to firm employment size and trade participation. We then extend the heterogenous-firm model of trade and inequality from Helpman et al. (2010) and estimate it with Brazilian data. We show that the estimated model provides a close approximation to the observed distribution of wages and employment. We use the estimated model to undertake counterfactuals, in which we find sizable effects of trade on wage inequality.

Original languageEnglish
Pages (from-to)357-405
Number of pages49
JournalReview of Economic Studies
Volume84
Issue number1
DOIs
StatePublished - Jan 2017
Externally publishedYes

Funding

FundersFunder number
Economic and Social Research CouncilES/M010341/1

    Keywords

    • International Trade
    • Wage Inequality

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