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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.
This thesis focuses on the study of different aspects of income inequality across and within countries. In the first chapter, I study how the optimal provision of human capital is distorted in the presence of borrowing constraints and private information on talent and wealth. It shows that elitist, non-merit based, access to higher education can be constrained optimal in poor and unequal countries. The second chapter documents how the IT revolution has changed the patterns of North-South trade and analyzes its effects on wage inequality. It provides theoretical and empirical results on wage polarization and a changes in the pattern of specialization. Finally, the third chapter provides a framework for estimating technological diffusion across countries. The framework is applied to study the diffusion of major technologies across the world since the Industrial Revolution. It is shown that differences in technology diffusion in the last two hundred years can account for two thirds of current income per capita differences.
This thesis develops empirical methodologies to investigate the effect of globalization on welfare and inequality both between- and within-countries. The first essay proposes a Roy-like model where workers are heterogeneous ill terms of their comparative and absolute advantage. We show that the schedules of comparative and absolute advantage (i) determine changes in the average and the variance of the log-wage distribution, and (ii) are nonparamnetrically identified from the cross-regional variation in the sectoral responses of employment and wages to observable sector-level demand shifters. Applying these results, we find that the rise in world commodity prices accounts for 5-10% of the fall in Brazilian wage inequality between 1991 and 2010. The second essay develops a methodology to construct nonparametric counterfactual predictions, free of functional-form restrictions on preferences and technology, in neoclassical models of international trade. First, we establish the equivalence between such models and reduced exchange models in which countries directly exchange factor services. This equivalence implies that, for an arbitrary change in trade costs, counterfactual changes in factor prices, and welfare only depend on the shape of a reduced factor demand system. Second, we provide sufficient conditions for the nionparainetric identification of this system. Together, these results offer a strict generalization of the parametric approach used in so-called gravity models. Finally, we use China's recent integration into the world economy to illustrate tile feasibility of our approach. The third essay investigates the connection between the recent rise in services trade and changes in labor market outcomes in different countries. We develop a theoretical framework where trade in services arises from the spatial unbundling of workers' task output. Transmission costs endogenously determine the magnitude of between-sector task trade both within a country ("outsourcing") and between countries ("offshoring"). We show that, while differentials in sectoral task prices decrease in response to outsourcing, they increase in response to offshoring. The heterogeneity in the composition of workers' task endowments controls responses in between- and within-sector wage inequality across countries.
'...an important and timely contribution to the study of South-South economic relations. It provides a cogent and detailed analysis...'-Henock Kifle, South Letter '...provides some interesting insights into the determinants and consequences of South-South trade.'- Frances Stewart, The World Economy 'This comprehensive, incisive work....represents both historical depth and topical breadth. ....This well-written analysis makes an important contribution to development studies, including development economics and development geography.'- Georges G. Cravins, The Journal of Asian Studies These essays explore interactions between North and South and South and South in trade, technology and finance, focusing on the interests of the South, and particularly the poor. The 'conventional' neo-classical approach is shown to have many theoretical deficiences, the consequences are often harmful to Southern interests, while the poor are neglected. The author concludes that the South should adopt a bargaining approach to N-S negotiations and urges for closer South-South relations in trade, technology and finance.
We introduce international trade costs are into a two country, dynamic general equilibrium model with Ricardian trade. Continuum of industries differs in technology, and firms produce final goods and engage in R & D activities. R & D races improve the quality of a good, and the winner of R & D race produces the state-of-the-art product. Wage-inequality, trade pattern, range of traded and non-traded goods sectors, innovation and growth rates are all endogenous. Countries have different long run growth rates due to the non-traded goods sector and heterogeneity of technology across countries. The growth rate is higher, the higher is the inventive step, the lower is the R & D difficulty, the more productive is the labor, and the larger is the other country?s population size. Globalization reduces the wage-inequality between Home and Foreign, and leads the country with wider range of export sector to innovate and grow faster than its trade partner.
The thesis consists of four core essays which focus on important issues relating to international trade, growth and inequality. The first essay examines the determinants of trade based on global production sharing (network trade) by building a theoretical framework and empirically testing it using a panel dataset. Over the past four decades, network trade has grown at a much faster rate than total world manufacturing trade. Identification of the determinants of this emerging trade pattern is, therefore, important for informing trade policy debates. The model used in the empirical analysis captures a number of important explanatory variables ignored in the previous literature. A range of panel data estimation techniques is used in the model. The results suggest that technology, institutions and macroeconomic stability all play a significant role in determining inter-country differences in network trade. The paper concludes with a discussion on the challenges for policy makers in their attempt to reap gains from global production sharing. The second essay studies the transmission of exchange rate changes into import prices (exchange rate pass-through) in the presence of global production sharing. The chapter builds and simulates a model, which postulates that exchange rate pass-through is lower for network trade compared to final goods trade. It is hypothesised that trade in parts and components, within network trade, is relatively sheltered from exchange rate movements because network trade is largely 'relationship-specific,' including intra-firm trade. Empirically, exchange rate pass-through is examined using a new dataset of manufacturing import prices compiled from the trade price database of the US Bureau of Labour Statistics. The findings indicate that the degree of exchange rate pass-through into the import prices of parts and components is considerably lower than that for import prices of final goods. The third essay examines patterns and determinants of global production sharing with an emphasis on how Australian manufacturing fits into global production sharing. Though Australia is a minor player in global production sharing, there is evidence that Australian manufacturing has a distinct competitive edge in specialized, skill-intensive tasks in several industries including aircraft, medical devices, machine tools, measuring and scientific equipment and photographic equipment. Specialization within global production sharing in high value-to-weight components and final goods, which are suitable for air transport, helps Australian manufacturing to overcome the 'tyranny of distance' in world trade. Institutions and technological base give Australia a competitive edge within global production sharing. The last essay examines the impact of inequality and poverty on economic growth. Recent research has highlighted a negative impact of inequality on economic growth. The paper re-evaluates this hypothesis, focusing on both inequality and poverty and their interaction. The paper initially replicates previous results, showing that inequality has a negative impact on growth. However, it is shown that after taking into account both inequality and poverty, the negative effect of inequality on growth appears to be concentrated amongst countries with high poverty. This finding makes a case for policies targeted towards alleviating poverty, rather than policies that redistribute without addressing absolute poverty.
This dissertation employs tools from Labor Economics and International Trade to study how workers and labor markets adjust to economic shocks arising from trade liberalization and technological change. It contributes to the existing literature by studying several economic mechanisms that determine the magnitudes of these adjustments. The first chapter of this dissertation analyzes the roles that skill transferability and the local industry mix have on the adjustment costs of workers affected by negative trade shocks. Using rich administrative data from Germany, we construct novel measures of economic distance between sectors based on the notion of skill transferability. We combine these distance measures with sectoral employment shares in German regions to construct an index of labor market flexibility. This index captures the degree to which workers from a particular industry will be able to reallocate into other jobs. We then study the role of labor market flexibility on the effect of import shocks on the earnings and the employment outcomes of German manufacturing workers. Among workers living in inflexible labor markets, the difference between a worker at the 75th percentile of industry import exposure and one at the 25th percentile of exposure amounts to an earnings loss of roughly 11% of initial annual income (over a 10 year period). The earning losses of workers living in flexible regions are negligible. These findings are robust to controlling for a wide array of region level characteristics, including region size and overall employment growth. Our findings indicate that the industry composition of local labor markets plays an important role on the adjustment processes of workers. In the second chapter, we develop and apply a framework to quantify the effect of trade on aggregate welfare as well as the distribution of this aggregate effect across different groups of workers. The framework combines a multi-sector gravity model of trade with a Roy-type model of the allocation of workers across sectors. By opening to trade, a country gains in the aggregate by specializing according to its comparative advantage, but the distribution of these gains is unequal as labor demand increases (decreases) for groups of workers specialized in export-oriented (import-oriented) sectors. The model generalizes the specific-factors intuition to a setting with labor reallocation, while maintaining analytical tractability for any number of groups and countries. Our new notion of "inequality-adjusted" welfare effect of trade captures the full cross-group distribution of welfare changes in one measure, as the counterfactual scenario is evaluated by a risk-averse agent behind the veil of ignorance regarding the group to which she belongs. The quantitative application uses trade and labor allocation data across regions in Germany to compute the aggregate and distributional effects of a shock to trade costs or foreign technology levels. For the extreme case in which the country moves back to autarky we find that inequality-adjusted gains from trade are larger than the aggregate gains for both countries, as between-group inequality falls with trade relative to autarky, but the opposite happens for the shock in which China expands in the world economy. In the third chapter, we use detailed production data from a large Latin American garment manufacturer to study the process of technology adoption and resulting productivity changes within a firm. We find that the adoption of modern manufacturing techniques increases productivity through two channels, a direct effect and a spillover effect across adjacent production units. By exploiting the gradual introduction of new manufacturing techniques across independent production units, we estimate a direct effect on productivity of roughly 30%. We also estimate large spillovers to neighboring untreated units which amount to a 25% increase in productivity. Both of these effects accumulate slowly over time. The timing and the magnitudes of the estimated spillover effects corroborate qualitative evidence consistent with knowledge diffusion, learning and imitation.
This paper analyzes the extent of income inequality from a global perspective, its drivers, and what to do about it. The drivers of inequality vary widely amongst countries, with some common drivers being the skill premium associated with technical change and globalization, weakening protection for labor, and lack of financial inclusion in developing countries. We find that increasing the income share of the poor and the middle class actually increases growth while a rising income share of the top 20 percent results in lower growth—that is, when the rich get richer, benefits do not trickle down. This suggests that policies need to be country specific but should focus on raising the income share of the poor, and ensuring there is no hollowing out of the middle class. To tackle inequality, financial inclusion is imperative in emerging and developing countries while in advanced economies, policies should focus on raising human capital and skills and making tax systems more progressive.
My dissertation examines the impact of technical change and international trade on wage inequality between skilled and unskilled labour. I address a number of puzzles, though one stands out. The Stolper-Samuelson theorem predicts that globalization will increase inequality in developed countries (the North) while decreasing inequality in developing countries (the South). Yet this is not what we observe. Inequality has been rising even in some Southern countries! In the first essay I use the Dornbusch-Fischer-Samuelson variant of the Heckscher-Ohlin model (QJE, 1980) to describe what happens when the North is the source of product innovation. I show how international trade creates general equilibrium incentives to transfer technology to the South. Since these transfer incentives are greatest for the least skill-intensive goods produced in the North, technology transfer reduces the relative demand for unskilled workers in the North, thus raising Northern inequality. From a Southern perspective, however, these transferred technologies are relatively skill intensive. Thus technology transfer raises the demand for skilled workers in the South, increasing Southern inequality. Contrary to the predictions of the Stolper-Samuelson theorem, Northern product innovation induces technology transfer of a form that raises inequality in both the North and the South. In the second essay I examine my theory's empirical relevance using very detailed (5-digit SITC) trade data. Just as predicted by the theory, I document the existence of a sequence of product cycles that are associated with skill upgrading (i.e., increasing employment of skilled workers in production processes) in producer countries. This sets the stage for an econometric analysis of the causal impact of product-cycle-driven technology transfer on skill upgrading across 28 countries and 28 industries. Issues of country fixed effects and endogeneity are addressed. The conclusion is that product-cycle-driven technology transfer can explain a significant portion of skill upgrading in both high-income and middle-income countries. My third essay uses the Dornbusch-Fischer-Samuelson variant of the Heckscher-Ohlin model again to explore additional issues surrounding exogenous Southern catch-up and skill biased technical change. It makes the simple point that trade provides a channel through which Southern catch-up can induce rising inequality not only in the South, but also in the North. Furthermore, contrary to the conventional view, Southern catch-up will increase real national income in both the North and the South.