The recent Brexit episode is being interpreted in some quarters as an anti-globalisation backlash. Free trade does not promise gains for all without a proper compensating mechanism that allows winners to bribe the losers. Also standard prediction of trade theory does point towards increasing wage inequality for the relatively skill abundant developed world. Theoretical discussion on compensating mechanism that addresses inequality is rare in trade literature. In a simple HOS model we consider tax policies that keep the pre-trade degree of inequality unchanged between skilled and unskilled workers. We discuss the problem of existence of such an inequality-neutral tax rate that generates a positive increment in the after tax skilled wage. Such a mechanism is likely to exist and is independent of whether the tax is progressive or proportional.
Download the paper in PDF format
Sugata Marjit
View all GEP discussion papers | View all School of Economics featured discussion papers
Sir Clive Granger BuildingUniversity of NottinghamUniversity Park Nottingham, NG7 2RD
Enquiries: hilary.hughes@nottingham.ac.uk