Fears of rising wage inequality and job loss loom large in current debates on free trade. Surprisingly, however, there exists little academic research on how to compensate those who lose from free trade. This policy paper reviews the existing theoretical literature on trade and compensation, and...

We use a dynamic general equilibrium trade model with comparative advantage, heterogeneous firms, heterogeneous workers and endogenous firm entry to analyze economic policy to compensate the losers of trade liberalization and to reduce the ensuing wage inequality. We consider several instruments...

We develop a dynamic trade model with comparative advantage, heterogeneous firms and workers and endogenous firm entry to study wage inequality during the adjustment to trade liberalization. We find that trade liberalization increases wage inequality both in the short run and in the long run. In...

Fears of increasing inequality play a dominant role in current debates on how globalization is affecting our economies. After a brief review of recent trends in wage inequality, this policy paper presents new insights on the dynamic effect of trade liberalization on wage inequality. In the...