Trade Liberalization, Labor Market Power, and Misallocation across Firms: Evidence from China's WTO Accession

51 Pages Posted: 8 May 2023

See all articles by Enze Xie

Enze Xie

School of Economics, Zhejiang University

Mingzhi Xu

INSE at Peking University

Miaojie Yu

Liaoning University

Date Written: August 14, 2024

Abstract

This paper studies the impact of trade liberalization on the heterogeneity of labor market power among manufacturing firms, which is a potential source of misallocation. The model shows that heterogeneity of labor market power distorts the allocation of the factors of production, and the variance in the natural log of the markdown serves as a sufficient statistic to infer its negative impact on overall production efficiency. Using China's accession to the World Trade Organization (WTO) as a natural experiment, the empirical results suggest that lower input tariffs decrease the variance in the natural log of the markdown, which reflects the improvement in misallocation. In contrast, reductions in output tariffs have no significant effects.

Keywords: heterogeneous monopsony power, misallocation, trade liberalization, markdown distribution JEL Codes: F12

Suggested Citation

Xie, Enze and Xu, Mingzhi and Yu, Miaojie, Trade Liberalization, Labor Market Power, and Misallocation across Firms: Evidence from China's WTO Accession (August 14, 2024). Available at SSRN: https://ssrn.com/abstract=4441901 or http://dx.doi.org/10.2139/ssrn.4441901

Enze Xie

School of Economics, Zhejiang University ( email )

Mingzhi Xu

INSE at Peking University ( email )

Peking University
China
Beijing, Beijing 100871
China

Miaojie Yu (Contact Author)

Liaoning University ( email )

Shenyang
China

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