abstract

While neoclassical theory emphasizes the impact of trade on wage inequality between occupations and sectors, more recent theories of firm heterogeneity point to the impact of trade on wage dispersion within occupations and sectors. Using linked employer-employee data for Brazil, we show that much of overall wage inequality arises within sector-occupations and for workers with similar observable characteristics; this within component is driven by wage dispersion between firms; and wage dispersion between firms is related to firm employment size and trade participation. We then extend the heterogenous-firm model of trade and inequality from Helpman, Itskhoki and Redding (Econometrica 2010) and estimate it with Brazilian data. We show that the estimated model provides a close approximation to the observed distribution of wages and employment. We use the estimated model to undertake counterfactuals, in which we find sizable effects of trade on wage inequality.

keywords: Wage inequality; international trade

jel: F12, F16, E24

Review of Economic Studies 2017, 84(1): 357-405 [doi html]

background

• American Economic Review Papers & Proceedings 2013, 103(3): 214-19 [doi html]
• online supplement [pdf 1.0M]
  (findings for other countries, theory appendix, econometric inference, dynamic model, data appendix, additional empirical results and robustness)
• nber working paper [17991] version
• cep discussion paper [1138] version
• voxdev [article]
• voxeu newsletter [article]
• replication code
  • replication code [zip 1.5M]
  • occupational concordances [pdf 232k]
• data sources
  • linked employer-employee data RAIS (in portuguese)
  • exporter data SECEX (description by OECD)