Smoothing the adjustment to trade liberalization

We use a dynamic general equilibrium trade model with comparative advantage, heterogeneous firms, heterogeneous workers and endogenous firm entry to analyze economic policy meant to compensate the losers of trade liberalization and reduce the ensuing wage inequality. We consider wage taxes, consumption taxes, profit taxes, firm entry subsidies, worker sector-migration subsidies and training subsidies, and find that the re-distributional and distortionary effects of these instruments differ very much. The most potent instrument to reduce the wage inequality after trade liberalization are training subsidies. They increase the supply of skilled workers and thereby reduce the skill premium.