Adam Spencer | Industrial Policy Wars and Inequality: Who Loses and When?

How does an industrial policy war affect worker inequality? How does this effect change over time? We develop a model to study how industrial policy affects the dynamics of the joint distribution of firms and workers, in the open economy. The model features two skill classes of workers, in addition to multiple sectors with varying skill intensities in production. Heterogeneous firms make decisions to offshore their production of inputs, in addition to export participation. Different industrial policy shocks generate alternative transmission channels in the model; after interacting with the dynamic decisions of firms and households, they can alter a country’s comparative advantage over time. While most industrial policies can serve to benefit the locally protected skill class of workers, these effects may take time to eventuate. Similarly, the costs these policy actions impose on the non-protected worker class may diminish over time.