All you need is love? Trade shocks, inequality, and risk sharing between partners

Abstract

A large literature suggests that growing international trade is among the drivers of rising labor earnings inequality within countries. We contribute to this literature by studying the distributional effects of Germany’s trade integration with China and Eastern Europe. We provide evidence that the trade shock explains 5–18% of the rise in earnings inequality between individual workers. However, when we take risk sharing between partners into account, we find that the inequality-increasing effect of the trade shock is up to 42% lower. Our results therefore suggest that a pure worker-level perspective which ignores risk sharing might give an incomplete picture of the distributional effects of international trade.