The Effect of Low-Wage Import Competition on U.S. Inflationary Pressure

Raphael Auer () and Andreas Fischer ()

No 2008-18, Working Papers from Swiss National Bank

Abstract: This paper develops a new methodology to estimate the effect of low-wage import competition on U.S. producer prices. We first document that when low-wage countries grow, their exports to the United States increase most in labor-intensive sectors. Second, we demonstrate that the temporary and relative component of imports induced by labor intensity and output growth in low-wage countries is orthogonal to U.S. supply and demand shocks and can, therefore, be utilized to identify the causal impact of import competition on prices. In a panel covering 325 manufacturing industries from 1997 to 2006, we find that imports from nine low-wage countries are associated with strong downward pressure on U.S. prices. When these nations capture 1% U.S. market share, producer prices decrease by 3.1%, which is nearly fully accounted by a 2.4% increase in labor productivity and a 0.4% decrease in markups. Overall, we find that imports from the examined countries have decreased U.S. manufacturing PPI inflation by around two percentage points each year.

Keywords: Low-Wage Country Import Competition; Comparative Advantage; Globalization (search for similar items in EconPapers)
JEL-codes: F14 F15 F16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lab
Date: 2008-12-08

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Persistent link: http://EconPapers.repec.org/RePEc:ris:snbwpa:2008_018

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