International Trade and Earnings Inequality: A New Factor Content Approach
We develop a new factor content approach to study the impact of trade on inequality. Our analysis generalizes the theoretical results of Deardorff and Staiger (1988) and improves on past empirical implementations of these results. Combined with unique administrative data from Ecuador, our approach yields measures of individual-level exposure to exports and imports, for both capital and labor income, as well as estimates of the incidence of such exposure across the income distribution. We find that international trade raises earnings inequality in Ecuador, especially in the upper-half of the income distribution. However, the drop in inequality experienced by Ecuador over the last decade would have been less pronounced in the absence of trade.
We thank Thomas Bijl, Juan David Hernandez, Shanon Hsuan-Ming Hsu, Wouter Leenders, Antoine Levy, and Miguel Vazquez Vazquez for excellent research assistance, as well as Jonathan Vogel, Adrian Wood, our discussants Oleg Itskhoki and Ahmad Lashkaripour, and numerous seminar participants for helpful comments. We are grateful to the Centro de Estudios Fiscales and the Departamento de Control of the Ecuadorian Tax Authority for outstanding collaboration. In addition, this paper has benefited from funding from the National Science Foundation (grant SES-1559015), the CEPR and the UK Department for International Development (DFID) (under the ‘Private Enterprise Development in Low-Income Countries’ program, reference MRG004 3834), and the European Research Council under the European Union’s Horizon 2020 research and innovation programme (grant agreement No 758984). The views expressed are not necessarily those of CEPR, DFID, or ERC. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.