Trade Liberalization and Labor Monopsony: Evidence from Chinese Firms

Abstract

Using firm-level data and variations in tariff reductions across industries in China, we find that input trade liberalization is associated with lower labor markdowns. Furthermore, these pro-competitive labor market effects are more pronounced for skill-intensive firms. We then derive in a simple model how firm size and firm entry interact with aggregate labor supply to determine equilibrium labor markdowns following input tariff reductions. Consistent with the model, we find evidence that labor markdowns fall more in labor markets where the aggregate labor undergoes greater expansion, especially for skill-intensive firms operating in regions with large contemporaneous college expansion reforms. Overall, our results suggest that labor market power may be an important margin of adjustment to trade liberalization.

Keywords: input trade liberalization, labor market power, skill intensity, China