Globalization, Trade Imbalances and Inequality

Abstract

We investigate the role of trade imbalances for the distributional consequences of globalization.We do so through the lens of a quantitative, general equilibrium, multi-country, multi-sector model of trade with four key ingredients: (a) workers with different levels of skills are organized into separate representative households; (b) endogenous trade imbalances arise from households' consumption and saving decisions; (c) production exhibits capital-skill complementarity; (d) labor market frictions across sectors and non-employment.We conduct a series of counterfactual experiments that illustrate the quantitative importance of both trade imbalances and capital-skill complementarity for the dynamics of the skill premium.We show that modelling trade imbalances can lead to stark differences between short-and long-run consequences of globalization shocks for the skill premium.

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