Timing of international market openings and shrinking middle-income class

This study analyzes the dynamic effects of international market openings on income distribution in a simple one-period model with bequest motive individuals. Existing related studies have discussed this issue in closed or small open economies by assuming initial differences in wealth distribution. This study departs from previous studies by assuming heterogeneity in ability in terms of skilled labor and focusing on the bequest (wealth) distribution at the time of market openings. We show that the impact of market openings depends on the level of economic development. If the markets open after the economy is well developed, individuals with middle abilities will get education and work as skilled labor in the long run. If the market opens beforehand, however, the individuals will not get education and their incomes will be equal to the incomes of individuals with low abilities. This study illustrates that early market opening may lead to a shrinking of the middle-income class.