Econometrica: Jul, 2010, Volume 78, Issue 4
Inequality and Unemployment in a Global Economy
Elhanan Helpman, Oleg Itskhoki, Stephen Redding
This paper develops a new framework for examining the determinants of wage distributions that emphasizes within‐industry reallocation, labor market frictions, and differences in workforce composition across firms. More productive firms pay higher wages and exporting increases the wage paid by a firm with a given productivity. The opening of trade enhances wage inequality and can either raise or reduce unemployment. While wage inequality is higher in a trade equilibrium than in autarky, gradual trade liberalization first increases and later decreases inequality.
Supplement to "Inequality and Unemployment in a Global Economy"
Appendix contains the full derivations of the expressions in the paper and additional supplementary derivations.