SEMINAR 2 April 2012: Giammario Impullitti, Cambridge University

Firm Heterogeneity, Directed Search and Wage Inequality in the Global Economy

Abstract

We incorporate directed search into a model of international trade with heterogeneous firms. In a first step, we derive a tractable static model with convex adjustment costs that generates a non-degenerate distribution of wages mirroring that of firms' productivities. Our general equilibrium model is recursive in that product market conditions affect labor market outcomes but not the other way round. We show that trade liberalization increases the exporter wage premium, together with the wages of all workers, so that no issue of compensation arises. However, wage dispersion and residual wage inequality increase with trade openness. Finally, the effect on the aggregate unemployment rate is ambiguous. We calibrate the model to US data and quantify the contribution of trade to the fast pace of residual inequality in the US in the last decades.