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Trade liberalization, firm entry, and income inequality

Version 2 2024-06-03, 18:29
Version 1 2019-07-22, 12:29
journal contribution
posted on 2024-06-03, 18:29 authored by CC Chao, Mong Shan EeMong Shan Ee, Xuan NguyenXuan Nguyen, ESH Yu
This paper examines the short- and long-run effects of trade liberalization via tariff reductions on income inequality in an economy, which is characterized by an imperfectly competitive urban manufacturing sector and a perfectly competitive rural agricultural sector. Tariff reductions reduce domestic output in the importable urban manufacturing sector, leading to shifts of capital from the urban sector to the rural agricultural sector. This can narrow the wage gap between skilled and unskilled labor in the short run. However, the lowered capital cost attracts new firms, and subsequently excessive entry of firms, to the urban manufacturing sector. This firm entry effect can mitigate the favorable effect of tariff reductions on wage inequality in the long run. Empirical study confirms the findings.

History

Journal

Review of international economics

Volume

27

Pagination

1021-1039

Location

Chichester, Eng.

ISSN

0965-7576

eISSN

1467-9396

Language

eng

Publication classification

C1 Refereed article in a scholarly journal, C Journal article

Copyright notice

2019, John Wiley & Sons Ltd

Issue

4

Publisher

John Wiley & Sons