The impact of international trade on firms and workers - empirical evidence from Germany

Abstract

In the wake of the Melitz (2003) model of heterogeneous firms in international trade, new theoretical models arose that try to assess the impact of trade on wage inequality within sectors, a feature that neoclassical trade theory cannot sufficiently explain. Based on the predictions of Helpman, Itskhoki & Redding (2010), we use the LIAB, a German linked employer-employee panel data set, in order to provide empirical evidence that gradual trade liberalization first increases and then decreases wage inequality.

While most of these new Melitz (2003) inspired models of heterogeneous firms only allow for firms with a binary export status, we further show that a continuous share of exports is of additional value when assessing the impact of trade exposure on certain firm characteristics.

By allowing for complementarities between two heterogeneous factors of production, namely workers and managers, in a simple neoclassical trade model of two countries, two sectors, and two factors, Grossman, Helpman & Kircher (2013) showed that the sorting and matching of heterogeneous factors can have an impact on the firm´s output and therefore on relative factor income. By again using the LIAB, we therefore aim to test if the above mentioned link between trade liberalization and factor ability as well as the ensuing impact on income dispersion can be underpinned by empirical evidence.