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


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.


Trade liberalization Wage inequality Adjustment dynamics 

JEL Classification

E24 F11 F16 J31 J62 



  1. Almeida, R., & Poole, J. P. (2013). Trade and labor reallocation with heterogeneous enforcement of labor regulations. Journal of Development Economics, 126, 154–166.Google Scholar
  2. Andolfatto, D. (1996). Business cycles and labor market search. American Economic Review, 86(1), 112–132.Google Scholar
  3. Artuç, E., Chaudhuri, S., & McLaren, J. (2010). Trade shocks and labor adjustment: A structural empirical approach. American Economic Review, 100(3), 1008–45.Google Scholar
  4. Autor, D. H., Dorn, D., & Hanson, G. H. (2013). The China syndrome: Local labor market effects of import competition in the United States. American Economic Review, 103(6), 2221–2168.Google Scholar
  5. Autor, D. H., Dorn, D., Hanson, G. H., & Song, J. (2014). Trade adjustment: Worker level evidence. Quarterly Journal of Economics, 129(4), 1799–1860.Google Scholar
  6. Autor, D. H., Katz, L. F., & Kearney, M. F. (2008). Trends in U.S. wage inequality: Revising the revisionists. Review of Economics and Statistics, 90(2), 300–323.Google Scholar
  7. Autor, D. H., Levy, F., & Murnane, R. J. (2003). The skill content of recent technological change: An empirical exploration. The Quarterly Journal of Economics, 118(4), 1279–1333.Google Scholar
  8. Balleer, A., & Van Rens, T. (2013). Skill-biased technological change and the business cycle. Review of Economics and Statistics, 95(4), 1222–1237.Google Scholar
  9. Becker, S. O., Ekholm, K., & Muendler, M.-A. (2013). Offshoring and the onshore composition of tasks and skills. Journal of International Economics, 90(1), 91–106.Google Scholar
  10. Bernard, A. B., Bradford Jensen, J., & Schott, P. K. (2006). Survival of the best fit: Exposure to low wage countries and the (uneven) growth of U.S. manufacturing plants. Journal of International Economics, 68(1), 219–237.Google Scholar
  11. Bernard, A. B., Jonathan Eaton, J., Jensen, B., & Kortum, S. (2003). Plants and productivity in international trade. American Economic Review, 93(4), 1268–1290.Google Scholar
  12. Bernard, A. B., Redding, S. J., & Schott, P. K. (2007). Comparative advantage and heterogeneous firms. Review of Economic Studies, 74(1), 31–66.Google Scholar
  13. Burstein, A., & Melitz, M. (2013). Trade liberalization and firm dynamics. In D. Acemoglu, M. Arellano, & E. Dekel (Eds.), Advances in economics and econometrics: tenth world congress, econometric society monographs (pp. 283–328). Cambridge: Cambridge University Press.Google Scholar
  14. Chaney, T. (2005). The dynamic impact of trade opening: Productivity overshooting with heterogeneous firms. unpublished manuscript.Google Scholar
  15. Coşar, K. (2013). Adjusting to trade liberalization: Reallocation and labor market policies. unpublished manuscript.Google Scholar
  16. Coşar, K., Guner, N., & Tybout, J. (2016). Firm dynamics, job turnover, and wage distributions in an open economy. American Economic Review, 106(3), 625–63.Google Scholar
  17. Dauth, W., Findeisen, S., & Suedekum, J. (2014). The rise of the East and the Far East: German labor markets and trade integration. Journal of the European Economic Association, 12(6), S.1643–1675.Google Scholar
  18. Di Comite, F., Nocco, A., & Orefice, G. (2018). Trade liberalization and the wage gap: The role of vertical linkages and fixed costs. Review of World Economics (Weltwirtschaftliches Archiv), 154(1), 75–115.Google Scholar
  19. Dix-Carneiro, R. (2014). Trade liberalization and labor market dynamics. Econometrica, 82(3), 825–885.Google Scholar
  20. Ebenstein, A., McMillan, M., Zhao, Y, & Zhang, C. (2011). Understanding the role of China in the decline of US manufacturing. Manuscript, Hebrew University of Jerusalem.Google Scholar
  21. Ebenstein, A., Harrison, A., McMillan, M., & Phillips, S. (2014). Estimating the impact of trade and offshoring on American workers using the current population surveys. Review of Economics and Statistics, 96(4), 581–595.Google Scholar
  22. Egger, H., & Kreickemeier, U. (2009). Firm heterogeneity and the labour market effects of trade liberalization. International Economic Review, 50(1), 187–216.Google Scholar
  23. Felbermayr, G., Prat, J., & Schmerer, H.-J. (2011). Globalization and labor market outcomes: Wage bargaining, search frictions, and firm heterogeneity. Journal of Economic Theory, 146(1), 39–73.Google Scholar
  24. Ghironi, F., & Melitz, M. (2005). International trade and macroeconomic dynamics with heterogeneous firms. Quarterly Journal of Economics, 120(3), 865–915.Google Scholar
  25. Goos, M., Manning, A., & Salomons, A. (2009). Job polarization in europe. American Economic Review, 99(2), 58–63.Google Scholar
  26. Helpman, E., Itskhoki, O., Muendler, M.-A., & Redding, S. (2012). Trade and inequality: From theory to estimation. Technical Report. unpublished manuscript, available at
  27. Helpman, E., & Itskhoki, O. (2010). Labor market rigidities, trade and unemployment. Review of Economic Studies, 77(3), 1100–1137.Google Scholar
  28. Helpman, E., Itskhoki, O., & Redding, S. (2010). Inequality and unemployment in a global economy. Econometrica, 78(4), 1239–1283.Google Scholar
  29. Itskhoki, O, & Helpman, E. (2014). The dynamic adjustment of firms and workers to foreign trade. (Working Paper). Harvard University OpenScholar.Google Scholar
  30. Kambourov, G. (2009). Labour market regulations and the sectoral reallocation of workers: The case of trade reforms. Review of Economic Studies, 76(4), 1321–1358.Google Scholar
  31. Kemeny, T., & Rigby, D. (2012). Trading away what kind of jobs? Globalization, trade and tasks in the US economy. Review of World Economics, 148(1), 1–16.Google Scholar
  32. Krishna, P., Poole, J. P., & Senses, M. Z. (2012). Trade, labor market frictions, and residual wage inequality across worker groups. The American Economic Review, 102(3), 417–423.Google Scholar
  33. Larch, M., & Lechthaler, W. (2011). Comparative advantage and skill-specific unemployment. BE Journal of Economic Analysis and Policy (Contributions), 11(1), 1–58.Google Scholar
  34. Lechthaler, W., & Mileva, M. (2014). Smoothing the adjustment to trade liberalization. Technical Report, (Kiel Working Paper 1948).Google Scholar
  35. Melitz, M. J. (2003). The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica, 71(6), 1695–1725.Google Scholar
  36. Mion, G., Vandenbussche, H., & Zhu, L. (2010). Trade with China and skill upgrading: Evidence from Belgian firm level data. (Working Paper Research 194). National Bank of Belgium.Google Scholar
  37. Pierce, J. R., & Schott, P. K. (2016). The surprisingly swift decline of U.S. manufacturing employment. The American Economic Review, 106(7), 1632–62.Google Scholar
  38. Ryoo, J., & Rosen, S. (2004). The engineering labor market. Journal of Political Economy, 112(S1), S110–S140.Google Scholar
  39. Spitz-Oener, A. (2006). Technical change, job tasks, and rising educational demands: Looking outside the wage structure. Journal of Labor Economics, 24(2), 235–270.Google Scholar
  40. Wacziarg, R., & Wallack, J. S. (2004). Trade liberalization and intersectoral labor movements. Journal of International Economics, 64(2), 411–439.Google Scholar

Copyright information

© Kiel Institute 2019

Authors and Affiliations

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

Personalised recommendations