Trade, inequality, and the endogenous sorting ofheterogeneous workers

Abstract

I present a new general equilibrium framework to quantify the effect of international trade on labor market outcomes such as the skill premium and reallocation of workers for a large number of countries. Worker-level comparative advantage based on workers' heterogeneous productivities is the key feature of the framework. I use household-level microdata to quantify key aspects of the model for 32 countries. I find that the calibrated decline in trade costs during 2000–2007 increased between-educational-type inequality in most countries regardless of country-level comparative advantages. The worker-level comparative advantage across sectors and occupations determines both the direction and the magnitude of the effect of trade on labor market outcomes. I also find that trade liberalization during 2000–2007 significantly contributed to the decline in manufacturing employment and job polarization in high-income countries. In addition, the model shows that the China effect measured by a decline in trade costs with China and an increase in China's manufacturing productivity during 2000–2007 increased inequality in most countries.