This paper proposes a new model of the link between expanding trade and rising wage inequality in developing countries, and investigates its causal implications in a newly constructed panel of Mexican manufacturing establishments. In a theoretical setting with heterogeneous firms and quality differentiation, only the most productive firms in a developing country like Mexico enter the export market, and they produce a better-quality good for export than for the domestic market in order to appeal to richer developed-country consumers. Producing high-quality goods requires paying high wages both to white-collar and to blue-collar – but especially to white-collar – employees. An increase in the incentive for developing-country producers to export generates differential quality upgrading within industries, as more-productive firms increase exports and produce a greater share of high-quality goods, while less-productive firms remain focused on the domestic market. This process raises wage inequality both between firms and within the firms that upgrade. The empirical part of the paper uses a major exchange rate shock – the Mexican peso crisis of late 1994 – to test this causal mechanism. I find robust evidence that during the years of the crisis initially more-productive plants increased both white-collar and blue-collar wages and

Although it is commonly believed that trade liberalization results in higher GDP, little is known about its effects on poverty and inequality. This paper uses the sharp trade liberalization in India in 1991, spurred to a large extent by external factors, to measure the causal impact of trade liberalization on poverty and inequality in districts in India. Variation in preliberalization industrial composition across districts in India and the variation in the degree of liberalization across industries allow for a difference-in-difference approach, establishing whether certain areas benefited more from, or bore a disproportionate share of the burden of liberalization. In rural districts where industries more exposed to liberalization were concentrated, poverty incidence and depth decreased by less as a result of trade liberalization, a setback of about 15 percent of India’s progress in poverty reduction over the 1990s. The results are robust to pre-reform trends, convergence and time-varying effects of initial district-specific characteristics. Inequality was unaffected in the sample of all Indian states in both urban and rural areas. The findings are related to the extremely limited mobility of factors across regions and industries in India. Indeed, in Indian states where inflexible labor laws impeded factor reallocation, the adverse impact of liberalization on poverty was more pronounced. The findings, consistent with a specific factors model of trade, suggest that to minimize the social costs of inequality, additional policies may be needed to redistribute some of the gains of liberalization from winners to those who do not benefit as much. Creating a flexible institutional environment will likely minimize the need for additional interventions. 1

In a model with search generated unemployment and heterogeneity on both sides of the labor market, we show that firms that export will be bigger, more capital intensive and pay higher wages than other firms. We also show that there will be imperfect persistence in the decision to export and that liberalization increases the wage gap between high and low skill workers. We also explore the relationship between openness and productivity and show that in export-oriented markets openness can increase aggregate productivity while generating within-firm productivity losses for the weakest firms. Finally, we show that openness can lead to within-firm productivity gains for the weakest firms in import-competing industries. We have benefited from discussions and correspondence with David Greenaway, Holger Gorg, Nina Pavcnik, Vitor Trindade, James Tybout and Susan Zhu. We are grateful for the help that they have provided.

In this paper I highlight the importance of incorporating the institutional features of local labor markets into the analysis of trade reforms. A trade reform is often deemed beneficial because the elimination of trade barriers allows labor to reallocate toward those sectors in the economy in which the country has a comparative advantage. The amount and speed of the reallocation, however, and the post-reform behavior of output, productivity and welfare, will depend on how regulated the labor market is. First, I document that high firing costs slow down the intersectoral reallocation of labor after a trade reform. Second, in order to isolate the effect of firing costs on labor reallocation, output, and welfare after a trade reform, I build a dynamic general equilibrium model. I find that if a country does not liberalize its labor market at the outset of its trade reform, the intersectoral reallocation of workers will be 30 % slower and as much as 30 % of the gains in real output and labor productivity in the years following the trade reform will be lost. From a policy standpoint, the message is that while trade reforms are desirable they need to be complemented by labor market reforms in order to be fully successful.

We present a model of trade and search-induced unemployment, where trade results from Heckscher-Ohlin (H-O) and/or Ricardian comparative advantage. Using cross-country data on trade policy, unemployment, and various controls, and controlling for endogeneity and measurement-error problems, we find fairly strong and robust evidence for the Ricardian prediction that unemployment and trade openness are negatively related. This effect dominates the positive H-O effect of trade openness on unemployment for capital-abundant countries, which turns negative for labor-abundant countries. Using panel data, we find an unemployment-increasing short-run impact of trade liberalization, followed by an unemployment-reducing effect leading to the new steady state.

Exporting firms are larger and more productive than non-exporting firms. Trade openness leads to an increase in intra-industry firm turnover. As trade is liberalized, large firms need more labor to produce and small firms exit, leading to a reallocation of labor from the former to the latter. This mech-anism leads to welfare gains as aggregate productivity is increased. This paper identifies another consequence of this transmission channel when labor market search frictions are introduced. I merge the Melitz (2003) model of intra-industry reallocations with the large firm model from Pissarides (2000) and do comparative statics on the level of employment. I find that higher trade exposure is associated with a lower level of employment, suggesting that trade generates more job destruction than creation. This result is due to interactions between goods and labor market imperfections. Finally I test the model predictions by applying GMM panel data methods to US sectoral job flows. The empirical findings confirm the theoretical results.

Tracking individual workers across sectors and firms after Brazil’s trade liberalization in 1990 shows that foreign import penetration triggers worker displacements but that neither comparative-advantage sectors nor ex-porters absorb displaced workers for years. Displacements are signif-icantly more and accessions significantly less frequent in comparative-advantage sectors and at exporters. Heightened import penetration is consequently associated with significantly more frequent transitions to informal work status and unemployment, and longer durations and more frequent failures of formal-job reallocations. So, the output reallocation to more productive firms after trade reform is not accompanied by sim-ilar labor reallocation. The sector and firm affiliation of high-turnover workers is not random. JEL F14, J23, J63 ∗We thank seminar and conference participants at Universidad de los Andes Bogotá, Pur-due, ANPEC, UC San Diego, Stanford, IPEA Rio de Janeiro, and the Munich-Tübingen Workshop in Trade. We thank Mary Amiti and Luis Servén for international trade data, and Paulo Furtado and the Brazilian ministry of labor for assistance with the RAIS worker data. We thank Alexandre Brandão and Aline Visconti at IBGE for tabulations of the PIA firm data. We are grateful to Jennifer Poole and Andrea Curi for superb research assistance. Muendler gratefully acknowledges financial support from the NSF under the grant SBE-0550699. In-depth statistics beyond this paper are available online from econ.ucsd.edu/muendler/research.

Reform and the Doha Development Agenda. The authors are grateful for helpful comments from project participants and journal referees, for tariff-cutting data from CEPII staff in Paris (with special thanks to David Laborde), and for funding from the UK’s Department for International Development. The views expressed are the authors ’ alone and not necessarily those of the World Bank, its Executive Directors or the countries they represent, nor the funder of the project.

Evolving openness to trade is hard to measure, despite its relevance to models of growth, inflation and exchange rates. Our innovative technique measures trade openness encompassing both observable trade policy (tariffs and surcharges) and unobservable trade policy (quotas and other nontariff barriers), capturing the latter by a smooth non-linear stochastic trend in a model for the share of manufactured imports in home demand for manufactured goods, controlling for the business cycle and exchange rate. The evidence for South Africa suggests that increased openness has significantly reduced the mean inflation rate and has reduced the exchange rate pass-through into wholesale prices.

Abstract: This paper focuses on the ability of the labor market to correctly match heterogeneous workers to jobs within a given industry and the role that globalization plays in that process. Using matched worker-firm data from Sweden, we find strong evidence that openness improves the matching between workers and firms in industries with greater comparative advantage. This suggests that there may be significant gains from globalization that have not been identified in the past – globalization may improve the efficiency of the matching process in the labor market. These results remain unchanged after adding controls for technical change at the industry level or measures of domestic anti-competitive regulations and product market competition. Our results are also robust to alternative measures of the degree of matching, openness, or the trade status of an industry.