The exporter wage premium when firms and workers are heterogeneous

In this paper, we develop a new model of international trade, in which workers featuring higher innate abilities match with firms featuring higher innate productivities. This model allows us to quantify the effect of trade on labour income inequality when workers have heterogeneous abilities within the broad groups of skilled and unskilled workers. Selfselection of the most productive firms into exporting generates an exporter wage premium, and our framework with skilled and unskilled workers allows us to decompose this premium into its skill-specific components. We employ linked employer-employee data from Germany to structurally estimate the parameters of the model. These parameter estimates imply an average exporter wage premium of 6 percent, with exporting firms paying no wage premium at all to their unskilled workers, while the premium for skilled workers is 15 percent. Measured by the Theil index, moving the economy to autarky would reduce wage inequality within the group of skilled workers by 29 percent, and it would reduce overall labour income inequality by 8 percent. (c) 2020 Elsevier B.V. All rights reserved.