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Trade and wage inequality
A classic question in international trade theory is how a change in a country’s exposure to trade affects the distribution of resources across economic activities within a country and the distribution of incomes across factors of production. Classical trade theory predicts changes in wage inequality due to reallocation of resources among industries. However, the empirical labor literature points to the importance of within-industry wage inequality and the empirical trade literature emphasizes within-industry, across firms, heterogeneity. To reconcile theory and data, we present a number of recent theoretical developments in the trade literature that emphasize the consequences of a reduction in export and import barriers on within-industry wage inequality. These theories could prove useful to revisit the change in wage inequality in Portugal after the entrance into the EU and to explain more recent patterns.