Does an Increase in Trade-Openness and Import-Penetration Affect Income Inequality? Evidence from the Manufacturing Sector Output Growth and Employment Growth

Abstract

Does an increase in trade-openness and import-penetration affect income inequality? We find that the manufacturing sector output growth and employment growth decline in response to positive trade-openness and import penetration shocks. This results in an increase in the Gini coefficient (income inequality). These results concur with vast literature and empirical findings showing that trade globalisation has a positive impact on income inequality. Furthermore, different sizes of positive shocks to trade-openness and import penetration depress the manufacturing sector output growth and employment and result in an increase in the Gini coefficient (income inequality). The results also show that the manufacturing sector output growth and employment growth decline more when the import penetration ratio is active in the model than when it is closed (the counterfactual response). Similarly, the Gini coefficient increases more when the import penetration ratio is active in the model than when it is closed. Thus, we conclude that the import penetration ratio amplifies the effects of trade-openness on the Gini coefficient and the manufacturing sector activity.