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Review of World Economics

, Volume 155, Issue 3, pp 407–457 | Cite as

Trade liberalization and wage inequality: new insights from a dynamic trade model with heterogeneous firms and comparative advantage

  • Wolfgang LechthalerEmail author
  • Mariya Mileva
Original Paper
  • 111 Downloads

Abstract

The authors develop a dynamic general equilibrium trade model with comparative advantage, heterogeneous firms, heterogeneous workers and endogenous firm entry to study wage inequality during the adjustment after trade liberalization and potential policy responses to reduce wage inequality. They calibrate the model to simulate trade liberalization between the US and China. In the short run, inter-sectoral wage inequality is high but then recedes as more and more workers move to the expanding exporting sector. The skill premium does not change much in the short run but increases substantially in the medium and long run. Training subsidies are more powerful than sector-migration subsidies in reducing the wage inequality induced by trade liberalization.

Keywords

Trade liberalization Wage inequality Adjustment dynamics 

JEL Classification

E24 F11 F16 J31 J62 

Notes

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Copyright information

© Kiel Institute 2019

Authors and Affiliations

  1. 1.Kiel Institute for the World EconomyKielGermany
  2. 2.California State UniversityLong BeachUSA

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