Firm Dynamics and Residual Inequality in Open Economies

Gabriel Felbermayr, Julien Prat and Giammario Impullitti

No 9855, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Increasing wage inequality between similar workers plays an important role for overall inequality trends in industrialized societies. To analyze this pattern, we incorporate directed labor market search into a dynamic model of international trade with heterogeneous firms and homogeneous workers. Wage inequality across and within firms results from their different hiring needs along their life cycles and the convexity of their adjustment costs. The interaction between wage posting and firm growth explains some recent empirical regularities on firm and labor market dynamics. Fitting the model to capture key features obtained from German linked employer-employee data, we investigate how falling trade costs and institutional reforms interact in shaping labor market outcomes. Focusing on the period 1996-2007, we find that neither trade nor key features of the Hartz labor market reforms account for the sharp increase in residual inequality observed in the data. By contrast, inequality is highly responsive to the increase in product market competition triggered by domestic regulatory reform.

Keywords: Directed search; Firm dynamics; International trade; Product and labor market regulation; Wage inequality (search for similar items in EconPapers)
JEL-codes: E24 F12 F16 (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-bec, nep-int, nep-mac and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Firm Dynamics and Residual Inequality in Open Economies (2018)
Working Paper: Firm Dynamics and Residual Inequality in Open Economies (2018)
Working Paper: Firm Dynamics and Residual Inequality in Open Economies (2016)
Working Paper: Firm Dynamics and Residual Inequality in Open Economies (2016)
Working Paper: Firm Dynamics and Residual Inequality in Open Economies (2014)
Working Paper: Firm Dynamics and Residual Inequality in Open Economies (2014)
Working Paper: Firm Dynamics and Residual Inequality in Open Economies (2014)
Working Paper: Firm Dynamics and Residual Inequality in Open Economies (2014)
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