Import Competition, Corporate Employment Efficiency, and Labor Reallocation

Abstract

This study, partly motivated by the re-emergence of Trump in the U.S., the increase in tariffs, and the role of labor utilization in corporate finance and accounting, examines the impact of import competition on corporate labor investment efficiency and labor reallocation. We show that firms are more likely to invest optimally in labor in response to an increased exposure to import competition. More specifically, we find that an increase in import competition improves labor investment efficiency by contracting labor in overinvestment firms and expanding labor in underinvestment firms. This result suggests the occurrence of inter-firm reallocation of labor. Further analysis suggests that Darwinian selection and agency problem mitigation are the two channels through which import competition affects labor investment efficiency. In additional tests we demonstrate that import competition has a stronger effect on firms operating in industries with low entry barriers and on those with investment policies that make them appear to be soft rivals.

Keywords: Import competition, labor investment efficiency, labor reallocation, import tariffs JEL Classification: F16, F66, G31, J24

JEL Classification: F16, F66, G31, J24