We use a dynamic general equilibrium trade model with comparative advantage, heterogeneous firms, heterogeneous workers and
endogenous firm entry to analyse economic policy to compensate the losers of trade liberalisation and to reduce the ensuing
wage inequality. We consider several instruments of economic policy: a wage tax to redistribute income between skilled and
unskilled workers; sector-specific consumption taxes and profit taxes to affect inter-sectoral wage inequality; sector-specific
firm entry subsidies, worker sector-migration subsidies and training subsidies to speed up the adjustment process. We find
that the re-distributional and efficiency effects of these instruments differ very much. Probably the most potent tool to
reduce the wage inequality after trade liberalisation is training subsidies. Although the policy also generates inefficiencies
because too many workers are trained, the costs of these inefficiencies are relatively low.
Forschungsbereich:Arbeitsmarktökonomie, Einkommen und soziale Sicherheit