Firm Dynamics and Residual Inequality in Open Economies

Gabriel Felbermayr, Giammario Impullitti and Julien Prat

No 2016-04, Discussion Papers from University of Nottingham, GEP

Abstract: Wage inequality between similar workers has been on the rise in many rich countries. Recent empirical research suggests that heterogeneity in firm characteristics is crucial to understand wage dispersion. Lower trade costs as well as labor and product market reforms are considered critical drivers of inequality dynamics. We ask how these factors affect wage dispersion and how much of their effect on inequality is attributable to changes in wage dispersion between and within firms. To tackle these questions, we incorporate directed job search into a dynamic model of international trade where wage inequality results from the interplay of convex adjustment costs with firms' different hiring needs along their life cycles. Fitting the model to German linked employer-employee data for the years 1996-2009, we find that firm heterogeneity explains about half of the surge in inequality. The most important mechanism is tougher product market competition driven by domestic product market deregulation and, indirectly, by international trade.

Keywords: Wage Inequality; International Trade; Directed Search; Firm Dynamics; Product and Labor Market Regulation. (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-bec, nep-dge, nep-int and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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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 (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)
Working Paper: Firm Dynamics and Residual Inequality in Open Economies (2014)
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