The Impact of WTO Accession on Chinese Firms’ Product and Labor Market Power

Tinbergen Institute Discussion Paper 2019-037/V

47 Pages Posted: 14 Jun 2019 Last revised: 22 Jun 2019

See all articles by Sabien Dobbelaere

Sabien Dobbelaere

Vrije Universiteit Amsterdam - Department of Economics; Tinbergen Institute; IZA Institute of Labor Economics

Quint Wiersma

affiliation not provided to SSRN

Date Written: June 2, 2019

Abstract

This paper examines the causal impact of domestic trade liberalization on Chinese firms' product and labor market power. To recover both market power measures, we identify a firm's regime of competitiveness, corresponding to a product market setting and a labor market setting, at any point in time. The identification is based on implementing the distance test, which takes the dependence between both settings into account. The product market setting is defined to be imperfectly competitive if the firm sets a price-cost markup, which is our model consistent measure of product market power. The labor market setting is defined to be imperfectly competitive if the firm either pays a wage markup or sets a wage markdown. Our model consistent measure of labor market power is either the workers' bargaining power during work-firm negotiations in the former or the wage elasticity of the firm's labor supply curve capturing its wage-setting power in the latter. To establish causal evidence of trade shocks on product and labor market power, we use China's WTO accession in 2001 as an identification strategy. Reducing tariffs on intermediate inputs decreases the likelihood of shifting firms away from an imperfectly competitive labor market setting. Reducing tariffs on final goods increases the likelihood of shifting firms away from setting wage markdowns. Trade liberalization via input tariff reductions increases a firm's price-cost markup but decreases the degree of wage-setting power that it possesses, conditional on the relevant product/labor market setting. Such joint responses of firms' pricing behavior in product and labor markets to trade policy changes are important for understanding the distributional consequences of trade shocks and the underlying drivers of increased inter-firm wage disparities.

Keywords: rent sharing, monopsony, price-cost markups, trade liberalization, firm panel data, hypothesis testing, inequality restrictions

JEL Classification: L20, C12, F61, J30

Suggested Citation

Dobbelaere, Sabien and Wiersma, Quint, The Impact of WTO Accession on Chinese Firms’ Product and Labor Market Power (June 2, 2019). Tinbergen Institute Discussion Paper 2019-037/V. Available at SSRN: https://ssrn.com/abstract=3397945 or http://dx.doi.org/10.2139/ssrn.3397945

Sabien Dobbelaere (Contact Author)

Vrije Universiteit Amsterdam - Department of Economics ( email )

De Boelelaan 1105
NL- Amsterdam, NL-1081 HV
Netherlands
0031 20 598 28 74 (Phone)

Tinbergen Institute

Keizersgracht 482
NL- Amsterdam, NL-1017 EG
Netherlands

IZA Institute of Labor Economics

P.O. Box 7240
D- Bonn, 53072
Germany

Quint Wiersma

affiliation not provided to SSRN

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