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Economies 2015, 3(4), 186-215;

The Redistribution of Trade Gains When Income Inequality Matters

Institute for Labour Law and Industrial Relations in the European Union (IAAEU), Trier University, Behringstr. 21, D-54296 Trier, Germany
Academic Editor: Ralf Fendel
Received: 29 June 2015 / Revised: 5 October 2015 / Accepted: 16 October 2015 / Published: 28 October 2015
(This article belongs to the Special Issue Globalization and Inequality)
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How does a redistribution of trade gains affect welfare when income inequality matters? To answer this question, we extend the [1] model to unionized labor markets and heterogeneous workers. As redistribution schemes, we consider unemployment benefits that are financed either by a wage tax, a payroll tax or a profit tax. Assuming that welfare declines in income inequality, we find that welfare increases up to a maximum in the case of wage tax funding, while welfare declines weakly (sharply) if a profit tax (payroll tax) is implemented. These effects are caused by the wage tax neutrality (due to union wage setting) and by a profit tax-induced decline in long-term unemployment. As a result, the government’s optimal redistribution scheme is to finance unemployment benefits by a wage tax. View Full-Text
Keywords: trade liberalization; redistribution; income inequality; heterogeneity; trade unions trade liberalization; redistribution; income inequality; heterogeneity; trade unions

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De Pinto, M. The Redistribution of Trade Gains When Income Inequality Matters. Economies 2015, 3, 186-215.

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