Inequality and Unemployment in a Global Economy

Authors

  • Elhanan Helpman,

    1. Dept. of Economics, Harvard University, 217 Littauer Center, Cambridge, MA 02138, U.S.A. and CIFAR; ehelpman@harvard.edu
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  • Oleg Itskhoki,

    1. Dept. of Economics, Princeton University, Fisher Hall 306, Princeton, NJ 08544-1021, U.S.A.; itskhoki@princeton.edu
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  • Stephen Redding

    1. Dept. of Economics, London School of Economics, Houghton Street, London, WC2A 2AE, United Kingdom; s.j.redding@lse.ac.uk
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    • This paper is a combined version of Helpman, Itskhoki, and Redding (2008a, 2008b). Work on these papers started when Redding was a Visiting Professor at Harvard University. We thank the National Science Foundation for financial support. Redding thanks the Centre for Economic Performance at the London School of Economics and the Yale School of Management for financial support. We are grateful to a co-editor, four anonymous referees, Pol Antràs, Matilde Bombardini, Arnaud Costinot, Gilles Duranton, Gene Grossman, James Harrigan, Larry Katz, Marc Melitz, Guy Michaels, Steve Pischke, Esteban Rossi-Hansberg, Peter Schott, Dan Trefler, and conference and seminar participants at AEA, Berkeley, CEPR, Chicago, Columbia, Harvard, LSE, NBER, NYU, Northwestern, Penn State, Princeton, Stanford, Stockholm, Tel Aviv, UCLA, and Yale for helpful comments. The usual disclaimer applies.


Abstract

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.

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