Future Development Reads: Reconciling the politics with the economics

Editor’s Note:

At the end of each week, one of the rotating editors for Future DevelopmentShanta Devarajan, Wolfgang Fengler, Indermit Gill, or Homi Kharas—provides recommended literature on a specific development topic.

We live in an era where political debates appear much shriller, and polarized, than economic analysis would predict. A case in point is the effect of trade opening on wage inequality, which, according to economics, could be ambiguous whereas the political rhetoric, especially in rich countries, is that it is always harmful. A recent paper in VoxDev reconciles this difference by showing that the initial effect of trade liberalization is increased wage inequality, but as firms’ input costs fall further, wage inequality begins to decline. In addition to deriving the result theoretically, they empirically corroborate it with data from Brazil.

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At a recent lecture at the World Bank, Pinelopi Goldberg from Yale cited a different effect, also in Brazil, that showed that the negative employment effects of trade liberalization tended to be magnified over time, and be reversed only by increased employment in…

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