How Global Trade Reshaped Wages from Within: CID Faculty Research Insights

How does trade liberalization reshape wage inequality, and why do exporting firms play such an outsized role in widening pay gaps within sectors and occupations?

Key Findings:

• Most inequality occurs within sectors and occupations: Over two-thirds of Brazil’s wage inequality—and most of its growth—is explained by variation among workers within the same sector and occupation.
• Between-firm wage differences dominate: Within sector-occupation cells, the majority of wage inequality growth is accounted for by wage dispersion across firms, rather than within them. Exporters consistently pay higher wages, even after controlling for size and worker characteristics.
• Exporting firms are larger and pay more: Firm wage premiums increase with firm size and are significantly higher among exporters. However, there is considerable overlap as some large, high-paying firms do not export, and some small, low-paying firms do.
• Structural model explains both selection and wage premia: The model incorporates firm productivity, screening costs for hiring high-ability workers, and heterogeneous fixed export costs. It predicts that exporting firms will be larger, more selective, and pay higher wages.
• Trade liberalization increases wage inequality: Model-based counterfactuals show that reducing trade barriers increases the share of workers employed by exporters and raises wage inequality. The estimated impact of observed liberalization in Brazil from 1986–1995 accounts for up to one-quarter of the observed increase in wage inequality. 

Impact and Relevance:

This paper contributes to how we understand the relationship between globalization and inequality. Rather than focusing solely on differences across sectors or skill groups, as emphasized by traditional trade theory, the authors show that rising wage inequality is driven in large part by firm-level dynamics within sectors. Their model, grounded in rich administrative data and structural estimation, reveals how exporting magnifies wage dispersion by allowing more productive firms to expand, screen for higher-ability workers, and pay wage premia. This reframing helps reconcile empirical evidence from many countries showing that most wage inequality is residual and occurs among seemingly similar workers. 
 
The findings have direct implications for evaluating the distributional consequences of trade liberalization. By simulating counterfactual scenarios, the authors show that even partial reductions in trade barriers can increase wage inequality meaningfully, not because of sectoral shifts, but because they amplify heterogeneity in firm performance and pay. This mechanism explains why globalization often generates both aggregate gains and sharper disparities, especially in labor markets with limited mobility or search frictions. Policymakers looking to make trade more inclusive must therefore consider not just compensation policies, but how to approach the inequality-inducing dynamics that arise from firm selection into export markets. 
 
More broadly, this research offers a general framework for integrating trade, labor, and firm behavior, an area of growing policy concern as countries navigate post-globalization challenges. Their model could inform policies on export promotion, industrial strategy, and wage subsidies. As debates continue around reshoring, supply chain resilience, and equitable growth, this work provides both rigorous tools and a clear lesson: trade affects inequality not only between sectors or workers, but also critically within firms and job types.