Trade Inequality in Developing Countries:
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Trade Inequality in Developing Countries: A General Equilibrium Analysis. Susan Zhu (Michigan State University) Dan Trefler (University of Toronto and CIAR) June 5, 2014. The Model. Follow Dornbusch, Fischer and Samuelson (1980) as closely as possible.

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Trade Inequality in Developing Countries: A General Equilibrium Analysis

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January 17 2013

Trade Inequality in Developing Countries:

A General Equilibrium Analysis

Susan Zhu (Michigan State University)

Dan Trefler (University of Toronto and CIAR)

June 5, 2014


January 17 2013

The Model

  • Follow Dornbusch, Fischer and Samuelson (1980) as closely as possible.

  • 2 regions, North (N) and South (S).

  • 2 factors, unskilled labor (L) and skilled labor (H).

  • Factor prices: wNL, wNH, wSL, andwSH .

  • Measure of inequality: wS = wHS/wLSandwN = wHN/wLN .

  • A continuum of goods indexed byzwith 0 < z < 1. No factor intensity reversals so that a largerzis indexes a more skill-intensive good.

  • CRS, perfect competition, no international barriers to trade in goods, Cobb-Douglas preferences, balanced trade.


January 17 2013

CS(wS)

CN(wN)

z–

North exports

South exports


January 17 2013

The Southern Wage Inequality Equation

Southern Demand for Skilled Labour

=g(z– , wS )

Southern Demand for Unskilled Labour

Southern Supply of Skilled Labour

= HS / LS

Southern Supply of Unskilled Labour

  • Dependent Variable

  • Southern Inequality: dln(wS)

  • Independent Variables

  • Trade Cut-Off: dln(z–)

  • Endowments: dln( HS / LS )


January 17 2013

The Export Share Shift Equation

In general equilibrium (z– , wS, wN) are endogenous.

Totally differentiate the 3 g.e. equations to solve for

dz– , dwS , and dwN .

Dependent Variable: dz–

Independent Variables:

  • Southern Catch-up

  • Endowments

    • dln( HS / LS )

    • dln( LS / LN )

    • dln( HN / LN )


January 17 2013

Measuring wS = wHS / wLS

  • Freeman and Oostendorp (2001) NBER database on wages by occupation and industry for 1983-97.

  • Use changes over the four periods 1983-86, 1986-89, 1990-93, and 1993-97.

  • Criterion for inclusion in dataset:

    • Per capita GDP below $14,000 in 1980.

    • Country had observations on a fixed set of manufacturing occupations for at least two periods.

    • Consistent data for both non-production occupations (managers, professionals, technicians, and clerks) and production occupations (craft workers, operators, and laborers).

    • 20 countries and 58 observations.


January 17 2013

Measuring dz–


January 17 2013

Conclusions

  • Exports by themselves have no impact on inequality. I devised a novel measure of the changing skill intensity of exports.

  • Southern catch-up shifts the South's export shares towards more skill-intensive goods.

  • The resulting shift in export shares increases the level of wage inequality.

  • Taken together, these conclusions mean that Southern catch-up has contributed to rising wage inequality in the South.

  • The model's exclusion restrictions are accepted by the data i.e., Southern catch-up raises wage inequality only indirectly by shifting export shares.


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