The Effect of Labor Market Competition on Firms, Workers, and Communities

Samuel Dodini, Katrine Løken and Alexander Willén ()

No 17/2022, Discussion Paper Series in Economics from Norwegian School of Economics, Department of Economics

Abstract: This paper isolates the impact of labor market competition on firms, workers, and communities. A shock to labor mobility from Sweden to Norway caused a substantial increase in labor competition for Swedish firms on the border with Norway. Using unique register data linked across the two countries, we show that Swedish firms respond by raising wages and reducing their workforces. The retained workers are of lower quality, resulting in a drop in value added and an increasing probability of market exit. Communities experience population flight, declining business activity, increased inequality, and increased support for worker protection parties. Norwegian firms benefit through cheaper labor costs, and there is evidence of Norwegian workers being displaced. The communities see increased support for anti-integration parties. We conclude that shocks to labor market competition, while benefiting certain workers, may have detrimental effects on local communities due to adverse effects on firm survival and business activity.

Keywords: Labor Market Competition; Outside Options; Labor Mobility; Inequality; Community Development (search for similar items in EconPapers)
JEL-codes: J24 J31 J42 J61 J62 (search for similar items in EconPapers)
Pages: 75 pages
Date: 2022-11-11
New Economics Papers: this item is included in nep-com, nep-eur, nep-lab, nep-mig and nep-ure
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Citations: View citations in EconPapers (1)

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