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Title: Heterogeneous Trade Costs and Wage Inequality: A Model of Two Globalizations

Citation Type: Miscellaneous

Publication Year: 2012

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Abstract: We develop a model for analyzing the distributional effects of two globalizations and their interdependence. We distinguish between two trade cost reductions, (i) trade liberalizations in the 1980s, which increased trade in low-skill-intensive goods (denoted LGlobalization)and (ii) reductions in communication costs due to the IT revolution, which raised trade in middle-skill-intensive goods during the 1990s (denoted C-Globalization). We consider a North-South trade economy in which the North is skill abundant. A freely traded final good is produced using high-skill services and a bundle of inputs. Inputs differon the intensity of middle and low-skill workers required to be produced, and are subject to heterogeneous trade costs. In the North, we find that wage inequality increases in the L-globalization. During the C-globalization, wage polarization emerges. The relative wage of high- to middle-skill workers increases, while the relative wage of middle- to low-skill is hump-shaped. We find a complementarity between the two globalizations. Wage polarization is delayed by the extent of trade in the L-globalization. In the South, we find that wage inequality increases in both globalizations. Finally, we show how asymmetric participation in the C-globalization of two southern countries generates a discontinuous patternof specialization. The southern country participating in the C-globalization specializes in the least and most skill-intensive traded inputs.

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Authors: Basco, Sergi; Mestieri, Marti

Publisher: Universidad Carlos III de Madrid, TSE

Data Collections: IPUMS USA

Topics: Other

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