A note on quantitative trade restrictions, income effects and wage inequality

This paper examines the effects of conversion of one type of physical trade restrictions into another on the intra-country wage inequality in a standard 2 × 2 × 2 Heckscher-Ohlin-Samuelson model. It shows that a conversion of an import-quota into an equivalent voluntary export restraint raises wage-inequality in the country importing the unskilled-labor intensive good and lowers the wage-inequality in its trading partner. This result does not depend on whether the unskilled-labor intensive good or the skilled-labor intensive good was initially subject to an import quota. Conversion of the import-quota into an equivalent import tariff, on the other hand, may lead to a rise in wage inequality in both countries. The driving force behind these results is the real income effect that conversion of one type trade restriction instrument into another results in.

► This paper shows global rise in wage inequality in a standard 2 × 2 HOS model. ► Conversion of import-quota into VER raises wage-inequality in one country ► This result does not depend on which good was initially subject to import quota. ► Conversion of import-quota into tariff may lead to global rise in wage inequality ► Income effects of these policy changes are the driving force for these results.