Inequality in a global economy: evidence from Germany

Abstract

In the wake of the Melitz (Econometrica 71(6):1695–1725, 2003) model of heterogeneous firms in international trade, new theoretical models arose that try to assess the impact of trade on wage inequality within sectors, a feature that neoclassical trade theory cannot sufficiently explain. Based on the predictions of Helpman et al. (Econometrica 78(4):1239–1283, 2010), we use the LIAB, a German linked employer–employee panel dataset, in order to provide empirical evidence that wage inequality first increases and then decreases with gradual trade liberalization.