DP2262 Trade, Wages, and Superstars
We study the effect of 'globalization' on wage inequality. Our 'global' economy resembles Rosen's (1981) 'Superstars' economy, where a) innovations in production and communication technologies enable suppliers to reach a larger mass of consumers and to improve the (perceived) quality of their products and b) trade barriers fall. When transport costs fall, income is redistributed away from the non-exporting to the exporting sector of the economy. As the former turns out to employ workers of higher skill and pay, the effect is to raise wage inequality.
Whether the least skilled stand to lose or gain from improved production or communication technologies, in contrast, depends on whether technology is skill-complementary, or a substitute. The model gives an intuitive explanation for the empirical regularities that skill intensity, market size and wages tend to be positively associated with exporting activity across sectors and plants.
