Smoothing the adjustment to trade liberalization

Wolfgang Lechthaler and Mariya Mileva

No 1948, Kiel Working Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: We use a dynamic general equilibrium trade model with comparative advantage, heterogeneous firms, heterogeneous workers and endogenous firm entry to analyze economic policy meant to compensate the losers of trade liberalization and reduce the ensuing wage inequality. We consider several instruments of economic policy: a wage tax to redistribute income between skilled and unskilled workers; sector-specific consumption taxes and profit taxes to affect inter-sectoral wage inequality; sector-specific firm entry subsidies, worker sector-migration subsidies and training subsidies to speed up the adjustment process. We find that the re-distributional and efficiency effects of these instruments differ very much. Probably the most potent instrument to reduce the wage inequality after trade liberalization are training subsidies. They increase the supply of skilled workers and thereby reduce the skill premium. The policy also generates inefficiencies because too many workers are trained, but the costs of these inefficiencies are relatively low.

Keywords: trade liberalization; wage inequality; adjustment dynamics; redistribution (search for similar items in EconPapers)
JEL-codes: E24 F11 F16 J62 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Smoothing the adjustment to trade liberalization (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1948

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