Trade and Real Wages of the Rich and Poor: Cross-Region Evidence

Trade liberalization affects real-wage inequality through two channels: the distribution of nominal wages across workers and, if the rich and the poor consume different bundles of goods, the distribution of price indices across consumers. I provide a unified framework incorporating both channels by allowing for non-homothetic preferences and worker heterogeneity across jobs. Because skill-intensive goods are also high-income elastic in the data, I find an intuitive, previously unexplored, and strong interaction between the two channels. I parametrize the model for 40 regions using sector-level trade and production data, and find that trade cost reductions decrease the relative nominal wage of the poor and the relative price index for the poor in all regions. On net, real-wage inequality falls everywhere.