DP7353 Inequality and Unemployment in a Global Economy

Author(s): Elhanan Helpman, Oleg Itskhoki, Stephen J. Redding
Publication Date: July 2009
Keyword(s): International Trade, Risk, Unemployment, Wage Inequality
JEL(s): E24, F12, F16
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7353

This paper develops a new framework for examining the distributional consequences of international trade that incorporates firm and worker heterogeneity, search and matching frictions in the labor market, and screening of workers by firms. Larger firms pay higher wages and exporters pay higher wages than non-exporters. The opening of trade enhances wage inequality and raises unemployment, but expected welfare gains are ensured if workers are risk neutral. And while wage inequality is larger in a trade equilibrium than in autarky, reductions of trade impediments can either raise or reduce wage inequality.