Intra-Industry Trade, Consumer Demand and Wage Inequality

Abstract

Numerous studies [1] [2] [3] [4] have shown that automation and college education may be a bigger contributor to wage-inequality than international trade. Most of these models of trade focus on “comparative-advantage” based trade (i.e. trade in different products). Although much of world-trade is “intra-industry” (i.e. trade broadly in the same industry) in nature, relatively fewer studies have examined the relationship between wage-inequality and intra-industry trade. This study examines the relationship between intra-industry trade and wage-inequality, using a two-sector model of monopolistic competition. Unlike previous research, this study examines this relationship through a lens that has not been explored much in the previous literature: differences in consumer demand, which can arise from factors such as demographic differences (e.g. whether a population is young or aging) between trade partners. My model suggests that: 1) intra-industry trade may be associated with wage-inequality between two sectors in the same country, 2) the magnitude of wage-inequality may depend on the differences in consumer demand in the countries that engage in international trade, and 3) wage-inequality can arise between sectors even if all workers have similar skills to begin with. These preliminary results may have some interesting implications for future research in the international trade literature.