Trade, wages and superstars

We study the effects of 'globalization' on income inequality in an economy where sellers with higher skills enjoy larger market shares and higher earnings. In our 'global' economy: (a) innovations in production and communication technologies enable suppliers to reach a larger mass of consumers and to improve the (perceived) quality of their products, and (b) trade barriers fall. When transport costs fall, income is redistributed away from the non-exporting to the exporting sector of the economy. As the latter turns out to employ workers of higher skill and pay, the effect is to raise wage inequality. Whether the least skilled stand to lose or gain from improved production or communication technologies, in contrast, depends on how technological change relates with skills. The model provides an intuitive explanation for why changes in wage premia are significantly associated with the export status of firms in recent firm-level empirical investigations. (C) 2001 Elsevier Science B.V. All rights reserved.