Trade Liberalization and Labor Market Institutions

Leonardo Baccini, Mattia Guidi, Arlo Poletti and Aydin B. Yildirim

International Organization, 2022, vol. 76, issue 1, 70-104

Abstract: While the firm-level distributional consequences of market liberalization are well understood, previous studies have paid only limited attention to how variations in domestic institutions across countries affect the winners and losers from opening up to trade. We argue that the presence of coordinated wage-bargaining institutions, which impose a ceiling on wage increases, and state-subsidized vocational training, which creates a large supply of highly skilled workers, generate labor market frictions. Upward wage rigidity, in particular, helps smaller firms weather the rising competition and increasing labor costs triggered by trade liberalization. We test this hypothesis using a firm-level data set of European Union countries, which includes more than 800,000 manufacturing firms between 2003 and 2014. We find that, for productive firms, gains from trade are 20 percent larger in countries with liberal market economies than they are in coordinated market economies. Symmetrically, less productive firms in coordinated market economies experience significantly smaller revenue losses compared to liberal market economies. We show that both the presence of an institutionalized wage ceiling and the availability of subsidized vocational training are key mechanisms for reducing the reallocation of revenue from unproductive to productive firms in coordinated market economies compared to liberal market economies. In line with our theory, we find that wages and employment in liberalized industries increase differentially across both types of labor markets. Finally, we provide suggestive evidence that trade liberalization triggers a differential demand for redistribution at the individual level across different labor markets, which is in line with our firm-level analysis.

Date: 2022
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.cambridge.org/core/product/identifier/ ... type/journal_article link to article abstract page (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cup:intorg:v:76:y:2022:i:1:p:70-104_4

Access Statistics for this article

More articles in International Organization from Cambridge University Press Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK.
Bibliographic data for series maintained by Kirk Stebbing ().