Firm Dynamics and Residual Inequality in Open Economies

Felbermayr, Gabriel; Impullitti, Giammario; Prat, Julien

Abstract

© The Author(s) 2018. Published by Oxford University Press on behalf of European Economic Association. All rights reserved. Wage inequality between similar workers has been on the rise in many rich countries. Recent empirical research suggests that heterogeneity in firm characteristics is crucial to understand wage dispersion. Lower trade costs as well as labor and product market reforms are considered critical drivers of inequality dynamics. We ask how these factors affect wage dispersion and how much of their effect on inequality is attributable to changes in wage dispersion between and within firms. To tackle these questions, we incorporate directed job search into a dynamic model of international trade where wage inequality results from the interplay of convex adjustment costs with firms' different hiring needs along their life cycles. Fitting the model to German linked employer-employee data for the years 1996-2009, we find that firm heterogeneity explains about half of the surge in inequality. The most important mechanism is tougher product market competition driven by domestic product market deregulation and, indirectly, by international trade.

Citation

Felbermayr, G., Impullitti, G., & Prat, J. (2018). Firm Dynamics and Residual Inequality in Open Economies. Journal of European Economic Association, 16(5), 1476-1539. https://doi.org/10.1093/jeea/jvx049

• Journal Article Type: Article
• Acceptance Date: Oct 5, 2017
• Online Publication Date: Feb 1, 2018
• Publication Date: 2018-10
• Deposit Date: Jun 25, 2018
• Publicly Available Date: Feb 2, 2020
• Journal: Journal of the European Economic Association
• Electronic ISSN: 1542-4774
• Publisher: Oxford University Press
• Peer Reviewed: Peer Reviewed
• Volume: 16
• Issue: 5
• Pages: 1476-1539
• DOI: https://doi.org/10.1093/jeea/jvx049
• Keywords: F12 - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation F16 - Trade and Labor Market Interactions E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivi
• Public URL: https://nottingham-repository.worktribe.com/output/909099
• Publisher URL: https://academic.oup.com/jeea/article/16/5/1476/4833556