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Firm Dynamics and Residual Inequality in Open Economies

Felbermayr, Gabriel; Impullitti, Giammario; Prat, Julien

Firm Dynamics and Residual Inequality in Open Economies Thumbnail


Gabriel Felbermayr

Julien Prat


© 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.

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
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
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