Labor market participation, income distribution, and welfare gains from trade

• Main Authors: CHANG, Pao-Li, CHEN, Yi-Fan, HSU, Wen-Tai
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2022
• Subjects: International Economics
• Online Access: https://ink.library.smu.edu.sg/soe_research/2614; https://ink.library.smu.edu.sg/context/soe_research/article/3613/viewcontent/20220514_Participation_Paper.pdf
• Institution: Singapore Management University

We develop a general equilibrium trade model where households with skill heterogeneity choose between home production and working on the labor market. Unlike most of the trade literature, the labor supply is elastic and is heterogeneous across households. As a result, trade affects labor participation, income, and welfare differently across households. We show that, when market goods and home goods are substitutes, households with lower skill levels expe-rience higher proportional increase to their income, while households with higher skill levels experience higher proportional increase in welfare. We further show that elastic labor supply preserves the extensive margin of welfare gains from trade via changes in national income. We quantify the welfare gains with detailed Taiwanese firm- and household-level data, and show that the extensive margin contributes 8% of overall welfare gains.