Heterogeneous trade costs and wage inequality: A model of two globalizations

Abstract

We develop a model for analyzing the distributional effects of two globalizations and their interdependence. We distinguish between two trade cost reductions, (i) trade liberalizations in the 1980s, which increased trade in low-skill-intensive goods (denoted L-Globalization) and (ii) reductions in communication costs due to the IT revolution, which raised trade in middle-skill-intensive goods during the 1990s (denoted C-Globalization). We consider a North-South trade economy in which the North is skill abundant. A freely traded final good is produced using high-skill services and a bundle of inputs. Inputs differ on the intensity of middle-and low-skill workers required to be produced, and are subject to heterogeneous trade costs. In the North, we find that wage inequality increases in the L-globalization. During the C-globalization, wage polarization emerges. The relative wage of high-to middle-skill workers increases, while the relative wage of middle-to low-skill workers is hump-shaped. We find a complementarity between the two globalizations. Wage polarization is delayed by the extent of trade in the L-globalization. In the South, we find that wage inequality increases in both globalizations. Finally, we show how asymmetric participation in the C-globalization of two southern countries generates a discontinuous pattern of specialization. The southern country participating in the C-globalization specializes in the least and most skill-intensive traded inputs.

Mergers Along the Global Supply Chain: Information Technologies and Routine Tasks

“…We study the 1990s because the pattern of North–South trade dramatically changed in those years. As argued in Baldwin (), Blinder () and Basco and Mestieri (), among others, the IT revolution was one of the main drivers of this change . Lastly, our proxy for adoption of IT at the country level is Internet users from WDI (World Bank), which is the most extensive Internet adoption variable available for Southern countries.…”

“…3 See Antràs (2014) for a survey of theoretical and empirical papers emphasizing the role of contractual frictions on the international organization of production. 4 See, for example, Baldwin (2012), Basco and Mestieri (2013) and Antràs and Chor (2013). 5 Our model considers two organizational forms: M&A and 'O-organtization'.…”

The world income distribution: the effects of international unbundling of production

“…The adoption of Information Technologies has been pointed out as one important reason behind the unbundling of production (see, for example, Basco and Mestieri, 2013). Moreover, Autor et al (2003) among others have argued that computerization, by eliminating laborintensive tasks, has also changed the income distribution within countries.…”

“…See, for example,Basco and Mestieri (2013) and the references therein. 8 Other papers that study how trade in goods affect economic growth includeVentura (1997),Bajona and Kehoe (2010),Baxter (1992),Cunat and Maffezzoli (2004) andDeardorff (2001b).…”

The Heterogeneous Effects of Trade across Occupations: A Test of the Stolper-Samuelson Theorem

“…The SS theorem has been used to explain why North-South trade can induce an increase in wage inequality (typically measured as the skill premium) in the North. The idea is that, from the North's perspective, trade with Southern countries represents a positive demand shock for skill intensive industries (see, for example, Feenstra and Hanson, 1995, Leamer, 1996, and Basco and Mestieri, 2013. This paper follows this tradition of studying trade and labor inequality through the lens of a factor proportion model.…”