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Firm Dynamics and Residual Inequality in Open Economies

Author

Listed:
  • Julien Prat

    (CREST)

  • Gabriel Felbermayr

    (University of Munich and Ifo Institute)

  • Giammario Impullitti

    (University of Nottingham)

Abstract
Increasing wage inequality between similar workers plays an important role for overall inequality trends in industrialized societies. To analyze this pattern, we incorporate directed job search into a dynamic model of international trade with heterogeneous firms and homogeneous workers. Wage inequality across and within firms results from their different hiring needs along their life cycles and the convexity of their adjustment costs. The interaction between wage posting and firm growth explains some recent empirical regularities on firm and labor market dynamics. Fitting the model to capture key features obtained from German linked employer-employee data, we investigate how falling trade costs and institutional reforms interact in shaping labor market outcomes. Focusing on the period 1996-2007, we find that neither trade nor key features of the Hartz labor market reforms account for the sharp increase in residual inequality observed in the data but can explain the fall in unemployment. By contrast, inequality appears highly responsive to the increase in product market competition possibly triggered by domestic regulatory reform.

Suggested Citation

  • Julien Prat & Gabriel Felbermayr & Giammario Impullitti, 2016. "Firm Dynamics and Residual Inequality in Open Economies," 2016 Meeting Papers 1121, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:1121
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    References listed on IDEAS

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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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