Inequality and Unemployment in a Global Economy
This paper develops a new framework for examining the distributional consequences of trade liberalization that is consistent with increasing inequality in every country, growth in residual wage inequality, rising unemployment, and reallocation within and between industries. While the opening of trade yields welfare gains, unemployment and inequality within sectors are higher in the trade equilibrium than in the closed economy. In the open economy changes in trade openness have nonmonotonic effects on unemployment and inequality within sectors. As aggregate unemployment and inequality have within- and between-sector components, changes in sector composition following the opening of trade complicate its impact on aggregate unemployment and inequality. However, when countries are nearly symmetric, the sectoral composition effects reinforce the within-sector effects, and both aggregate inequality and aggregate unemployment rise with trade liberalization.
Work on this paper started when Redding was a Visiting Professor at Harvard University. Helpman thanks the National Science Foundation for financial support. Redding thanks the Centre for Economic Performance at the London School of Economics for financial support. We are grateful to Pol Antràs, Gilles Duranton, Gene Grossman, Esteban Rossi-Hansberg, Dan Trefler, and seminar participants at LSE, Toronto and Yale for helpful comments. We are also grateful to Eduardo Morales for excellent research assistance. The usual disclaimer applies. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Elhanan Helpman & Oleg Itskhoki & Stephen Redding, 2010. "Inequality and Unemployment in a Global Economy," Econometrica, Econometric Society, vol. 78(4), pages 1239-1283, 07. citation courtesy of