The Impact of Trade Liberalization on Firms' Product and Labor Market Power

62 Pages Posted: 10 Feb 2020

See all articles by Sabien Dobbelaere

Sabien Dobbelaere

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

Quint Wiersma

Vrije Universiteit Amsterdam

Abstract

This paper examines the impact of trade liberalization on firms' product and labor market power. We estimate the prevalence and intensity of firm-level price-cost markups and either wage markups or wage markdowns. We take the dependence between these model-consistent measures of product and labor market power explicitly into account. To identify the effect of trade shocks on product and labor market power, we exploit China's reductions in input and output tariffs upon its accession to the World Trade Organization.We find that trade liberalization has not switched firms away from exercising product and labor market power. Reducing tariffs on intermediate inputs has increased a firm's price-cost markup but decreased the degree of wage-setting power that it possesses, conditional on exercising product/labor market power. Finally, we find heterogeneous effects of trade liberalization on the intensity of firms' product and labor market power, giving insights into the true consequences of trade shocks.

Keywords: price-cost markups, wage markups, wage markdowns, trade liberalization, tariffs

JEL Classification: F14, F16, L11, P31

Suggested Citation

Dobbelaere, Sabien and Wiersma, Quint, The Impact of Trade Liberalization on Firms' Product and Labor Market Power. IZA Discussion Paper No. 12951, Available at SSRN: https://ssrn.com/abstract=3534499

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

Vrije Universiteit Amsterdam

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