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Firm dynamics and residual inequality in open economies

Firm dynamics

Gabriel Felbermayr, Giammario Impullitti and Julien Prat

Recent empirical research suggests that firm characteristics are crucial drivers of wage inequality. How do trade, labor and product market reforms affect wage dispersion across similar workers? How much of the surge in inequality produced by these reforms is attributable to changes in wage dispersion between and within firms?

In this School of Economics working paper, published in the Journal of the European Economic Association, Gabriel Felbermayr, Giammario Impullitti and Julien Prat incorporate directed job search into a dynamic model of international trade. 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 1996-2009, the authors explain about half of the inequality dynamics due to firm heterogeneity. The most important mechanism is tougher product market competition driven by domestic product market deregulation and, indirectly, international trade.

Journal of the European Economic Association, "Firm Dynamics and Residual Inequality in Open Economies", by Gabriel Felbermayr, Giammario Impullitti and Julien Prat.

 

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Posted on Monday 16th October 2017

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