Trade with Central and Eastern Europe: Is it Really a Threat to Wages in the West?

35 Pages Posted: 20 Sep 2010

See all articles by Eva Katalin Polgar

Eva Katalin Polgar

European Central Bank (ECB)

Julia Wörz

Oesterreichische Nationalbank (OeNB)

Date Written: September 13, 2010

Abstract

This paper analyses the relationship between openness to trade and wages at the industry level (15 manufacturing industries) in 25 EU countries over the period from 1995 to 2005. By applying a cross-country and industry-specific approach, it is possible to control for unobserved heterogeneity at both country and industry levels. We also differentiate between intra- and inter-industry trade as well as between trade from western and eastern Europe and we try to assess the relative importance of foreign wages versus domestic productivity developments in an open environment. We find that trade is not an important driver of wages, since the wage response to trade is small. Moreover, in line with the Stolper-Samuelson reasoning, imports from the west generally benefit wages in central and eastern Europe, while imports from the east rather tend to harm wages in the west. The overall wage response is still negative in some sectors, particularly in more resource-based industries. Nevertheless, increased trade reinforces the productivity-wage link and weakens the co-movement of wages particularly in the west, while at the industry level there is little evidence of such a wage disciplining effect of trade.

Keywords: Openness, Wages, Bilateral Trade, European Integration, Wage Discipline, Industry Level

JEL Classification: F14, F15, F16, J31

Suggested Citation

Polgar, Eva Katalin and Wörz, Julia, Trade with Central and Eastern Europe: Is it Really a Threat to Wages in the West? (September 13, 2010). ECB Working Paper No. 1244. Available at SSRN: https://ssrn.com/abstract=1676144

Eva Katalin Polgar (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Julia Wörz

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3, PO Box 61
Vienna,
1010 Vienna, A-1011
Austria

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