Unequal Effects of Trade on Workers with Different Abilities

In recent research, we have proposed a new framework for examining the determinants of income inequality, which emphasizes firm and worker heterogeneity and selection into export markets. In this paper, we use our framework to examine how wage inequality and unemployment vary across workers with different abilities. Both in the closed and open economy, the unemployment rate is decreasing in worker ability, whereas both the average wage and wage inequality are increasing in worker ability. Upon opening the economy to trade, however, intermediate-ability workers experience reductions in average wages and increases in unemployment rates relative to both lower and higher ability workers. (JEL: F12, F16, E24) (c) 2010 by the European Economic Association.