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GTAP Resource #4366

"Varying mark-ups and income inequality in an open economy"
by Tamminen, Saara

Empirically and theoretically trade openness has been found to increase
especially within-country wage income inequality. Recently, empirical studies have emphasized also the role of capital income, capital gains and top incomes earners in the widening of total income distributions in
various countries. We contribute to the literature by analysing how
a change in markups in an open economy affects different income inequality
measures and unemployment rate. While the assumption of fixed markups
has still been common in theoretical models that analyse the topic,
in empirical studies markups have been often found to decrease when
an open economy faces tougher competition. We use the general equilibrium
framework of Egger&Kreickemeier (2012) for the analysis, which includes firm heterogeneity in productivity, fair wage setting and an analysis on
the effects for different income inequality measures. We find, contrary
to earlier studies, that tougher competition increases the unemployment
rate, income inequality between capital income and wage income and
the Gini indexes of both wage and capital income. This is due to the
increase in the productivity level required to operate, which subsequently
decreases the number of firms. Labour supply increases, since the
more productive firms that stay in operation need less employees than
the less productive firms that drop out of business. In the end, a
smaller share of firm owners and employees will be able to enjoy the
export premium in profits and wages and income distributions widen.

Resource Details (Export Citation) GTAP Keywords
Category: 2014 Conference Paper
Status: Published
By/In: Presented at the 17th Annual Conference on Global Economic Analysis, Dakar, Senegal
Date: 2014
Created: Tamminen, S. (4/8/2014)
Updated: Tamminen, S. (4/8/2014)
Visits: 1,110
- Demographics
- Economic analysis of poverty
- Economic development
- Economic growth
- Labor market issues
- Not Applicable

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