We study the distributional consequences of trade in a world with two industries and two heterogeneous factors of production. Productivity in each production unit reflects the ability of the manager and the abilities of the workers, with complementarity between the two. We begin by examining the forces that govern the sorting of worker and manager types to industries, and the matching of workers and managers within industries. We then consider how changes in relative output prices generated by changes in the trading environment affect sorting, matching, and the distributions of wages and salaries. We distinguish three mechanisms that govern the effects of trade on income distribution: trade increases demand for all types of the factor used intensively in the export sector; trade benefits those types of a factor that have a comparative advantage in the export sector; and trade induces a re-matching of workers and managers within both sectors, which benefits the more able types of the factor that achieves improved matches.
Matching, Sorting, and the Distributional Impacts of International Trade
Journal of Political Economy, 2017, 124(1), 224-264. With G. Grossman & E. Helpman. (simulations, matlab).
We introduce two-sided heterogeneity into a Hecksher-Ohlin-style trade model to study factor reallocation and wage inequality within and across sectors.
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