Trade, technology, and the channels of wage inequality

We use a large sample of German workers to analyse whether low-wage competition with China and Eastern Europe (the East) affects the wage structure within German manufacturing industries. In order to identify the channels through which trade and technology affect wage inequality, we decompose wages into firm and worker components. We find that the rise of market access and the competitiveness of the East has a substantial impact on inequality via the worker-wage component. While we find no large effect of the firm effect and assortative matching on overall inequality we find that trade induced matching is relevant for high-tech industries. We also account for exposure to technological change and do not find an effect on the dispersion of wage components. Overall, trade explains around 15% of the recent increase in wage inequality. (C) 2020 Published by Elsevier B.V.