The Effects of Globalization on Wage Inequality: New Insights from a Dynamic Trade Model with Heterogeneous Firms

The authors Sebastian Braun, Wolfgang Lechthaler and Mariya Mileva show that trade liberalization increases wage inequality. In the short-run, this is driven by an increase in inter-sectoral wage inequality, in the long run by an increase in the skill premium. Good training opportunities can considerably reduce the effects of trade liberalization on wage inequality. Restricting trade liberalization to selected sectors is shown to be harmful, because it reduces the beneficial effects of trade liberalization while failing to protect vulnerable workers.