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This thesis consists of three essays about international trade and wage inequality. Essay I characterizes optimal trade and FDI policies in a model with monopolistic competition and firm-level heterogeneity similar to Helpman et al. (2004). I find that both the optimal import tariffs and the optimal FDI subsidies discriminate against the more profitable foreign firms. This is because of the existence of a wedge between the private incentives of exporting and FDI firms, and the incentive of the representative agent. Essay II develops an elementary theory of global supply chains. It considers a world economy with an arbitrary number of countries, one factor of production, a continuum of intermediate goods, and one final good. Production of the final good is sequential and subject to mistakes. In the unique free trade equilibrium, countries with lower probabilities of making mistakes at all stages specialize in later stages of production. Using this simple theoretical framework, it offers a first look at how vertical specialization shapes the interdependence of nations. Essay III proposes a model that has as ingredients heterogeneity of workers and firms, complementarity between occupations within each firm and complementarity between workers and firms/occupations. The competitive equilibrium features positive assortative matching and leads to both within- and between- firm wage variations. Comparative static results are then derived to generate new insights about changes in these components of wage inequality.
The distributional effects of globalization on income have been one of the most important issues in international trade. Whether globalization is one of the explanations of the increasing wage inequality in both developing and developed countries or not has been a debate since 1990s. My dissertation investigates this topic from three aspects: who does trade affect between-group inequality through firm training, market potential and cross-country income, openness and within-group wage inequality. The first chapter incorporates firm-specific training into a recent framework of search model developed by Helpman, Itskhoki and Redding (2010) with heterogeneous firms and two types of workers. More productive firms hire workers with higher average learning ability, invest more on training both skilled and unskilled workers, hire relatively more skilled workers and pay relatively higher wages to skilled workers. Exporting increases wage and training received by workers in a firm with given productivity. For each type of worker, training inequality and wage inequality moves together after opening to trade. Empirical evidence based on firm- and worker-level data is also provided to support model predictions. The second chapter challenges the traditional belief that the US labor productivity advantage in the late 19th century should be attributed to its large domestic market. We assess whether a more general measure of "market access" mattered for the US position in the cross-country distribution of income per capita between 1900 and 1910. After constructing market access measures for 25 countries based on a general equilibrium model of production and trade, the US does not have an overall lead in market access matching its rank in the income distribution. France, Germany and the UK appear to have larger domestic markets than the US. Still, market access does correlate positively with income per capita in the broader sample. We then simulate a general equilibrium trade model with trade costs and provide a calculation of the welfare gains from removing international borders. The largest European countries could not have closed their gap with the US with higher market potential. On the other hand, many small countries could have done so. While market access may not have been crucial for explaining US success, it was an important determinant of real incomes for the most advanced small open-economies. The third chapter provides evidence on the relationship between within-group wage inequality and the degree of openness. One of the key predictions from the theoretical model in Helpman, Itskhoki and Redding (2010) is that there is a non-monotonic relationship between within-group wage inequality and openness, depending on the fraction of exporting firms. In this chapter, I propose a way to test this prediction by constructing a panel data including around 50 manufacturing industries over 34 years. The residuals from Mincer regression is used to calculate within-group wage inequality index. The preliminary results are consistent with these theoretical predictions.
This book presents a comprehensive analysis of contemporary issues in international trade and economic development. Emphasising the significance of economic development within policymaking, the book covers important issues like the provisioning of public goods, its implication in a liberalised regime, crime and corruption, skilled–unskilled wage inequality, income distribution and unemployment, environmental regulation and role of educational capital and informal sector. The volume deals with the impact that different aspects of international trade and investment are likely to have on the above-mentioned areas. The essays, written to honour the memory of Professor Sarbajit Chaudhuri, also examine topics that focus on public policy related to immigration of skilled workforce, political resistance and political compulsions that a democratic government might face in keeping with its commitment to tariff reforms, gender wage gap and issues related to globalisation, income distribution and unemployment. The book will be of invaluable interest to postgraduate students, scholars and researchers of development economics, international economics and labour economics and to those working on theoretical research on applications of general equilibrium trade models in developing countries.