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 earn ings. In our 'global' economy: (a) innovations in production and communicat ion technologies enable suppliers to reach a larger mass of consumers and t o 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 ineq uality. Whether the least skilled stand to lose or gain from improved produ ction or communication technologies, in contrast, depends on how technologi cal change relates with skills. The model provides an intuitive explanation for why changes in wage premia are significantly associated with the expor t status of firms in recent firm-level empirical investigations. (C) 2001 E lsevier Science B.V. All rights reserved.