ECONOMIC RESEARCH AND ANALYSIS


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The outcome of the Essay Award was announced at the annual meeting of the European Trade Study Group in Helsinki on 8-10 September 2016.

The paper by Matthieu Bellon focuses on the dynamic effect of trade liberalization on wage distribution. It develops a dynamic general equilibrium model with worker and firm heterogeneity. The paper finds that trade liberalization increases overall welfare and provides firms with both new export markets and new sources of competition. Expanding high-paying firms increase wages to recruit better workers at a faster rate. Workers in the firms threatened by competition accept wage cuts to delay their employers’ exit from the market and to keep their job. Using firm-worker data from France, the author shows that, following trade liberalization, inequality initially increases and peaks after three years, but eventually falls back to half of its peak level in the longer term.

The paper by Eunhee Lee investigates the effect of international trade on inequality and shows the mechanism through which a reduction in trade costs can increase inequality in developing countries. This paper shows that although the reduction of trade costs produces overall welfare gains for a country as a whole, inequality between skilled and unskilled workers increases because wages for high-skilled occupations rise more than wages in low-skill occupations. The paper shows that  inequality between workers with different levels of education increased due to trade shocks in both high- and low-income countries between 2000 and 2010. Although the paper does not address policy implications, it highlights that understanding these mechanisms and effects is key to crafting better policies to avoid or minimize the negative social impacts of trade opening. Developing and implementing such policies would provide a better chance of maintaining support for open trade since trade continues to be beneficial overall for all countries and all occupations and types of worker.

Matthieu Bellon (www.columbia.edu/~mb3413) is a French national. He received his Ph.D. in economics from Columbia University in 2016. He will work as an economist at the International Monetary Fund, starting in September 2016.

Eunhee Lee (www.eunhee-lee.com) is from the Republic of Korea. She obtained her Ph.D. in economics from Yale University in 2016. She will work as Assistant Professor of Economics at the University of Maryland, starting in autumn 2016.

The Academic Selection Panel comprised Dr Avinash Dixit (Emeritus Professor of Economics, Princeton University), Dr Robert Staiger (Professor of Economics, Dartmouth College), Dr Robert Teh (Economic Research and Statistics Division, WTO) and Dr Alberto Trejos (Professor of Economics, INCAE Business School). Dr Roberta Piermartini (Counsellor, Economic Research and Statistics Division, WTO) coordinated the work of the panel.

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