The increasing flow of goods, services, capital, and labor across national borders further complicates the debate on how modern societies can and should address the widening gap between rich and poor. It is also equally important to understand how firms, which are the engines of growth and job creation, behave in response to trade liberalization and affect the domestic labor market. In general, exporting firms demonstrate higher wages as well as higher productivity and larger firm size than non-exporting firms. We also find a wide variation of wages within industries, and especially between exporting and non-exporting firms.

Recent studies in international trade have addressed these well-known patterns that were previously unexplained with traditional trade models. Based on the heterogeneous firm model, various types of firm-worker rent sharing features in imperfect labor markets have been used to explain the impact of trade liberalization on labor market outcomes such as unemployment and wage. Moreover, these theoretical models have been supported with empirical evidence by analyzing the increasingly available firm- and plant-level panel datasets. However, most of these studies are focused on firms in the Americas or in Europe.

This research will examine how trade liberalization affects wage inequality in an export-driven economy. Specifically, I will use Korean firm-level panel data to examine the differential effect of tariff reduction on wage inequality between exporting and non-exporting firms. Furthermore, I will also examine wage inequality by specific groups of workers (by gender and employment status) and how trade liberalization affects firm investment on human capital. This research will contribute to the literature by providing a case study of an emerging economy that is highly dependent on international trade. It will also exploit the rich information on firm performance and human capital investment provided in the Korean firm-level panel datasets.