Globalization, Inequality and Welfare
This paper studies the welfare implications of trade opening in a world in which trade raises aggregate income but also increases income inequality, and in which redistribution needs to occur via a distortionary income tax-transfer system. We provide tools to characterize and quantify the effects of trade opening on the distribution of disposable income (after redistribution). We propose two adjustments to standard measures of the welfare gains from trade: a ‘welfarist’ correction inspired by the Atkinson (1970) index of inequality, and a ‘costly-redistribution’ correction capturing the efficiency costs associated with the behavioral responses of agents to trade-induced shifts across marginal tax rates. We calibrate our model to the United States over the period 1979-2007 using data on the distribution of adjusted gross income in public samples of IRS tax returns, as well as CBO information on the tax liabilities and transfers received by agents at different percentiles of the U.S. income distribution. Our quantitative results suggest that both corrections are nonnegligible: trade-induced increases in inequality of disposable income erode about 20% of the gains from trade, while the gains from trade would be about 15% larger if redistribution was carried out via non-distortionary means.
We thank Nathan Hendren and Esteban Rossi-Hansberg for fruitful conversations during the early stages of this project. This paper was previously circulated under the title “Inequality, Costly Redistribution and Welfare in an Open Economy”. We are indebted to Xiang Ding and Teresa Fort for their help obtaining a key moment in our calibration from U.S. Census data, and to Daniel Feenberg for his assistance with the NBER-IRS data. We are also grateful to seminar audiences at LSE, Barcelona Summer Forum, Degit XX in Geneva, SED in Warsaw, AEEFI in San Sebastián, Penn State, ITSG in Rome, IMF, Princeton, Stanford, UBC, National University of Singapore, Lausanne, NOITS in Oslo, Bocconi, Seoul National University, Bayreuth, Harvard, and the Federal Reserve Board for their suggestions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
The data used in this paper is for the most part publicly available. Our understanding, however, is that we will not be able to post the NBER-IRS Public Use Samples on the AER website. The data is, however, easily accessible by NBER researchers, and we will certainly provide code for replication purposes.
Pol Antràs & Alonso de Gortari & Oleg Itskhoki, 2017. "Globalization, inequality and welfare," Journal of International Economics, vol 108, pages 387-412. citation courtesy of