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Inequality and Unemployment in a Global Economy



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Inequality and Unemployment in a Global Economy Elhanan Helpman Harvard University and CIFAR Oleg Itskhoki Princeton University Stephen Redding London School of Economics February 9 2010 Abstract This paper develops a new framework for examining the determinants of wage distributions that emphasizes within industry reallocation labor market frictions and di erences in workforce composition across firms More productive firms pay higher wages and exporting increases the wage paid by a firm with a given productivity The opening of trade enhances wage inequality and can either raise or reduce unemployment While wage inequality is higher in a trade equilibrium than in autarky gradual trade liberalization first increases and later decreases inequality Key words Wage Inequality International Trade Risk Unemployment JEL classification F12 F16 E24 This paper is a combined version of Helpman Itskhoki and Redding 2008a 2008b Work on these papers started when Redding was a Visiting Professor at Harvard University We thank the National Science Foundation for financial support Redding thanks the Centre for Economic Performance at the London School of Economics and the Yale School of Management for financial support We are grateful to Daron Acemoglu four anonymous referees Pol Antr s Matilde Bombardini Arnaud Costinot Gilles Duranton Gene Grossman James Harrigan Larry Katz Marc Melitz Guy Michaels Steve Pischke Esteban Rossi Hansberg Peter Schott Dan Trefler and conference and seminar participants at AEA Berkeley CEPR Chicago Columbia Harvard LSE NBER NYU Northwestern Penn State Princeton Stanford Stockholm Tel Aviv UCLA and Yale for helpful comments The usual disclaimer applies 1 Introduction Two core issues in international trade are the allocation of resources across economic activities and the distribution of incomes across factors of production In this paper we develop a new framework for examining the determinants of resource allocation and income distribution in which both



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