Trade and Inequality: From Theory to Estimation
While neoclassical theory emphasizes the impact of trade on wage inequality between occupations and sectors, more recent theories of firm heterogeneity point to the impact of trade on wage dispersion within occupations and sectors. Using linked employer-employee data for Brazil, we show that much of overall wage inequality arises within sector-occupations and for workers with similar observable characteristics; this within component is driven by wage dispersion between firms; and wage dispersion between firms is related to firm employment size and trade participation. We then extend the heterogenous-firm model of trade and inequality from Helpman, Itskhoki, and Redding (2010) and estimate it with Brazilian data. We show that the estimated model provides a close approximation to the observed distribution of wages and employment. We use the estimated model to undertake counterfactuals, in which we find sizable effects of trade on wage inequality.
We thank the National Science Foundation for financial support. We also thank SECEX/MEDIC and Ricardo Markwald at FUNCEX Rio de Janeiro for sharing firm trade data. We are very grateful to Sam Bazzi, Lorenzo Casaburi, Itzik Fadlon, Adam Guren, Eduardo Morales and Jesse Schreger for excellent research assistance. We thank Mark Aguiar, Carlos Henrique Corseuil, Kerem Co sar, Angus Deaton, Thibault Fally, Cecilia Fieler, Leo Feler, Penny Goldberg, Gita Gopinath, Gene Grossman, Bo Honor e, Guido Imbens, Larry Katz, Francis Kramarz, Rasmus Lentz, Brian McCaig, Marc Melitz, Naercio Menezes-Filho, Eduardo Morales, Ulrich Muller, Andriy Norets, Richard Rogerson, Esteban Rossi-Hansberg, Andres Santos, Mine Senses, Robert Shimer, Chris Sims, John Van Reenen, Jon Vogel, Yoto Yotov and seminar participants at the Administrative Data for Public Policy Conference Singapore, Bayreuth, CESifo, IAE Workshop at UAB, CEPR, Columbia, EITI, FGV Rio de Janeiro, Georgia, Harvard, Humboldt Berlin, IAS, IGC Trade Programme Meeting at Columbia, JHU-SAIS, Maryland, Munich, NBER, Notre Dame, Princeton, SED, Syracuse, Toronto, the Philadelphia Fed Trade Workshop, UBC Vancouver, UC San Diego, Wisconsin, World Bank and WTO for helpful comments and suggestions. The usual disclaimer applies. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Elhanan Helpman & Oleg Itskhoki & Marc-Andreas Muendler & Stephen J. Redding, 2017. "Trade and Inequality: From Theory to Estimation," The Review of Economic Studies, vol 84(1), pages 357-405. citation courtesy of