Brown Bag Seminar:Trade Liberalization and Labor Market Institutions

Abstract: While the distributional consequences of trade liberalization at the firm level are now well understood, the previous literature has paid limited attention to how variations of domestic institutions across countries impact the reallocation effect suggested by the New New Trade Theory. We advance the argument that labour market institutions systematically influence the distributional effects of trade. Specifically, we contend that the presence of institutions of coordinated wage bargaining, which pose a ceiling to wage increases, helps smaller firms weather the raising competition triggered by tariff reduction. We test this hypothesis using a firm-level dataset on EU countries, which includes more than 800,000 manufacturing firms between 2003 and 2016. We rely on a novel measure of preferential tariff reductions to capture the occurrence of trade liberalization. We find that, for productive firms, gains from trade are twice as large in countries with liberal wage bargaining as they are in countries with coordinated wage bargaining. We complement our analysis by showing that there is a weaker demand for redistribution in latter case as a result of the occurrence of preferential liberalization. The results of our paper inform a growing literature on the winners and losers from trade liberalization at the firm level, pointing out the importance of institutions in taming market forces.