Trade, inequality, and the size of the welfare state

Miriam Kohl

No 01/17, CEPIE Working Papers from Technische Universität Dresden, Center of Public and International Economics (CEPIE)

Abstract: This paper investigates the effects of international trade in a general equilibrium model with heterogeneous firms where a welfare state redistributes income. We look at a very stylised progressive non-distortionary redistribution scheme. We show that for a given tax rate international trade increases income per capita, but also leads to higher income inequality. Two aspects of income inequality are examined. First, inter-group inequality between managers and workers is considered. Second, intra-group inequality within the group of managers is investigated. For a given tax rate the size of the welfare state and therefore the transfer per capita increases when going from autarky to trade. This second-round effect counteracts the primary increase in inequality, yet cannot outweigh it. Since the redistribution scheme is non-distortionary, it is possible to decrease trade-induced inequality by increasing the tax rate without jeopardising the gains from trade.

Keywords: International trade; Income inequality; Redistribution; Heterogeneous firms (search for similar items in EconPapers)
JEL-codes: D31 F12 F16 H24 H25 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-int and nep-pbe
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tudcep:0117

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