Impact of international trade on the income gaps between formal and informal sectors: Evidence from China

Using national longitudinal survey data, this study examines the impact of international trade on income gaps between formal and heterogeneous informal workers in China. The results demonstrate that the positive effect of trade on income is larger for informal employees and smaller for self‐employed workers compared to formal employees. The decomposition results indicate that the disproportionate geographic distribution in tradable regions widens the income gaps between employment sectors, while the difference in international trade income premiums widens the income gap between formal and informal employees and narrows the income gap between formal employees and self‐employed workers.