Firm Heterogeneity and the Labor Market Effects of Trade Liberalization

Egger, Hartmut; Kreickemeier, Udo

doi:10.1142/9789813224919_0010

Cited by 102 publications

(170 citation statements)

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“…Furthermore, we highlight a novel effect of financial markets on income inequality that works via goods trade and yields predictions that are consistent with the negative correlation between financial market development and income inequality within countries identified in the empirical literature (Clarke, Xu, and Zou, 2003;Liang, 2006;Beck, Demirgüç-Kunt, Levine, 2007). 4 in a number of recent papers addressing the role of trade liberalization for wage inequality (Felbermayr, Prat and Schmerer, 2011, Egger and Kreickemeier, 2008, 2012, and Helpman, Itskhoki, and Redding, 2010, but without considering frictions on the capital market and endogenous industry location. This paper combines trade, labor migration, credit constraints and inequality in a unified framework and studies the link between trade integration and financial market development.…”

Section: Introductionsupporting

confidence: 74%

Regional implications of financial market development: Industry location and income inequality

Ehrlich¹,

Seidel²

2015

European Economic Review

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We develop a heterogeneous-firms model with trade in goods, labor mobility and credit constraints due to moral hazard. Mitigating financial frictions reduces the incentive of mobile workers to migrate to one region such that an unequal distribution of industrial activity becomes less likely. Hence, financial market development has opposite regional implications as trade liberalization. While the former leads to more dispersion of economic activity across space, the latter tends to drive clustering. This has immediate implications for income inequality both between regions and workers. According to our model, financial development reduces inequality in both dimensions. ; Tel.: +41 31 631 8075.Recent research in international trade has studied the impact of credit constraints for exports, comparative advantage and welfare (e.g. Ju and Wei, 2011, Egger and Keuschnigg, 2014), but ignored industry location and inequality. The latter is highlighted 3 The empirical relevance of agglomeration economies has been well documented. For instance, Ellison, Glaeser, and Kerr (2010) and Redding and Sturm (2008) provide convincing evidence for demand-linkages and the home-market effect which are at the center of the location mechanism in our model. 4 In a working paper version of this paper, we provide empirical evidence for a negative relationship between financial market development and and the concentration of economic activity across European regions. This finding is consistent with our model and suggests that financial markets play a decisive role for location decisions of firms (see Ehrlich and Seidel, 2013a).

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Section: Introductionsupporting

confidence: 74%

Regional implications of financial market development: Industry location and income inequality

Ehrlich¹,

Seidel²

2015

European Economic Review

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“…These authors also prove that firms also pay the fair wage to hire workers associated with a normal level of effort. According to Egger and Kreickemeier (), the fair wage in every country is decided by two components:

w_{1}^{FW} (ϕ) = ϕ^{θ} {(λ_{1}^{FW} {\overset{w}{true}}_{1})}^{1 - θ},

where “FW” denotes the variables in the fair wage setting.

λ_{1}^{FW}

is the employment rate,

{\overset{true¯}{w}}_{1}

is the average wage of employed workers, and

θ \in (0, 1)

is the rent sharing parameter.…”

Section: Models With Fair Wage Mechanismsmentioning

confidence: 99%

“…Our results show that welfare is always lower associated with an imperfect labor market than in the full‐employment case, regardless of the population size. Egger and Kreickemeier () have proved that welfare increases as trade becomes freer. In contrast to their results, in our research, when the home country has a smaller population size, it is intriguing to see that welfare is slightly decreasing and then increasing in trade freeness under a fair wage setting.…”

Section: Introduction and Related Literaturementioning

confidence: 99%

Unemployment with trade and firm heterogeneity

Hung

Peng

2019

Int J of Economic Theory

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By specifying the setting of the footloose capital model with firm heterogeneity, this paper examines the effects of trade liberalization on unemployment through two different mechanisms: firstly, we embed search frictions into the labor market; and secondly, we consider fair wages as the source of unemployment. In the model with search frictions, we find that both the expected wage and employment rate could be higher for a small country with better search technology. In the fair wage setting, the results show that an increase in trade freeness increases the unemployment rate of the large (small) country when the trade freeness is sufficiently high (low). Finally, we try to compare the welfare levels under different scenarios and discover that unemployment may lead to a deterioration in the welfare gains from trade.

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“…Many general equilibrium models of international trade feature worker heterogeneity and look at the distributional effects of trade through the prism of Stolper–Samuelson‐type effects (Egger and Kreickemeier, ; Helpman et al ., ; Harrigan and Reshef, ). In these models, heterogeneity of wages comes from heterogeneity of firms' productivities and the employment draw of each consumer completely determines her relative gains from trade .…”

Section: Related Literaturementioning

confidence: 99%

On Measuring the Welfare Gains from Trade Under Consumer Heterogeneity

Nigai

2015

The Economic Journal

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I develop a multi-country, multi-industry model of trade that features heterogeneous consumers with non-homothetic preferences. I use the model to quantify the measurement errors in the welfare gains estimates caused by the assumption of a representative consumer (ARC). First, I reduce the world level of all trade costs by 15% and find that ARC overestimates (underestimates) the gains of the poor (rich) by up to 5 (11) percentage points. Second, I eliminate import tariffs around the globe and show that the loss of tariff revenues is not negligible for some consumers and that the measurement errors from ARC are between À15 and 4% points.Surveys frequently point to the enormous heterogeneity in individual attitudes towards free trade policies. While a majority of relatively rich and educated individuals seems to favour lowering barriers to trade, up to 80% of the poor do not feel helped by globalisation and consistently oppose free trade policies.1 What is the reason for this large gap between the poor and the rich in terms of their views on the potential benefits from international trade? Conventional wisdom suggests that the reason for this disparity is broadly related to the Stolper-Samuelson-type effects when people with different skills, abilities or employment statuses experience heterogeneous effects of trade on their earnings.2 I argue, however, that even in the absence of asymmetric wage effects, the welfare gains from trade are highly heterogeneous across consumers due to consumer-specific price effects. For instance, in 2006 in the US, 32% of consumers believed that free trade agreements would lead to a decrease in domestic prices, while 30% believed they would increase them and 23% expected no significant change. This large degree of heterogeneity of opinions suggests that people consume different bundles of goods and that the price effects of trade liberalisation may be asymmetric across those bundles. I develop a general equilibrium model of trade that gets to grips with these two features by combining consumer heterogeneity, nonhomotheticity of preferences and sector-specific trade elasticity parameters. In the

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Firm Heterogeneity and the Labor Market Effects of Trade Liberalization

Cited by 102 publications

References 0 publications

Regional implications of financial market development: Industry location and income inequality

Regional implications of financial market development: Industry location and income inequality

Unemployment with trade and firm heterogeneity

On Measuring the Welfare Gains from Trade Under Consumer Heterogeneity

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