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Does Trade Increase Inequality when Skills are Endogenous?

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  • Eckhard Janeba

Abstract

The paper explores the role of government policies in a situation where the wage gap between high‐skilled and low‐skilled workers is widening owing to increasing foreign competition in low‐skilled intensive goods. A two‐period, three‐sector general‐equilibrium model of a small open economy is developed in which individuals choose whether to invest in skills or not. The government influences individual decision‐making through its tax system. The paper shows that increasing import competition or lowering taxes on skilled workers widens inequality when the skill distribution is exogenous (the direct effect), but often the opposite occurs through the indirect effect, that is through the additional incentive to become skilled. Numerical results indicate that there exists a nonmonotonic relationship between the terms of trade and inequality. The indirect effect tends to dominate the direct effect when import competition is intense, and vice versa.

Suggested Citation

  • Eckhard Janeba, 2003. "Does Trade Increase Inequality when Skills are Endogenous?," Review of International Economics, Wiley Blackwell, vol. 11(5), pages 885-898, November.
    • Handle: RePEc:bla:reviec:v:11:y:2003:i:5:p:885-898
    DOI: 10.1046/j.1467-9396.2003.00424.x
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    References listed on IDEAS

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    1. Dani Rodrik, 1998. "Has Globalization Gone Too Far?," Challenge, Taylor & Francis Journals, vol. 41(2), pages 81-94, March.
    2. Deardorff, A.V., 1997. "International Externalities in the Use of Domestic Policies to Redistribute Income," Working Papers 405, Research Seminar in International Economics, University of Michigan.
    3. Robert Z. Lawrence & Matthew J. Slaughter, 1993. "International Trade and American Wages in the 1980s: Giant Sucking Sound or Small Hiccup?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2 Microec), pages 161-226.
    4. Eckhard Janeba, 2000. "Trade, Income Inequality, and Government Policies: Redistribution of Income or Education Subsidies?," NBER Working Papers 7485, National Bureau of Economic Research, Inc.
    5. repec:fth:michin:405 is not listed on IDEAS
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    Cited by:

    1. Egger, Hartmut & Fischer, Christian, 2020. "Increasing resistance to globalization: The role of trade in tasks," European Economic Review, Elsevier, vol. 126(C).
    2. Joel HELLIER, 2023. "Increasing skill premium and education decisions: Higher intra-skilled inequality and lower inter-skill mobility," Working Papers 643, ECINEQ, Society for the Study of Economic Inequality.
    3. Spiros Bougheas & Richard Kneller & Raymond Riezman, 2011. "Optimal Education Policies And Comparative Advantage," Pacific Economic Review, Wiley Blackwell, vol. 16(5), pages 538-552, December.
    4. Kjell Erik Lommerud & Bjørn Sandvik & Odd Rune Straume, 2004. "Good Jobs, Bad Jobs and Redistribution," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(4), pages 703-720, December.
    5. Udo Kreickemeier, 2009. "Trade, technology, and unemployment: the role of endogenous skill formation," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 42(2), pages 639-664, May.
    6. Hartmut Egger & Peter Egger & Josef Falkinger & Volker Grossmann, 2010. "The Impact of Capital Market Integration on Educational Choice and the Consequences for Economic Growth," The World Economy, Wiley Blackwell, vol. 33(10), pages 1241-1268, October.
    7. Wolfgang Lechthaler & Mariya Mileva, 2014. "Smoothing the Adjustment to Trade Liberalisation. WWWforEurope Working Paper No. 61," WIFO Studies, WIFO, number 47248, March.
    8. Nathalie Chusseau & Joel Hellier, 2014. "Globalization and social segmentation," Working Papers 339, ECINEQ, Society for the Study of Economic Inequality.
    9. Hartmut Egger & Gabriel Felbermayr & Gabriel J. Felbermayr, 2007. "Endogenous Skill Formation and the Source Country Effects of International Labor Market Integration," CESifo Working Paper Series 2018, CESifo.
    10. Wolfgang Lechthaler & Mariya Mileva, 2021. "Smoothing the adjustment to trade liberalization," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 48(4), pages 903-946, November.
    11. Joel HELLIER, 2021. "Globalization and Inequality in Advanced Economies: A Provisional Assessment," Working Papers 575, ECINEQ, Society for the Study of Economic Inequality.

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