Recasting the trade impact on labor share: a fixed-effect semiparametric estimation study

The cross-country declined labor share has been partially attributed to rising trade openness. However, the role of exports and imports in the literature was not studied separately and assumed to be homogeneous across countries. We propose two hypotheses for how exports and imports can affect labor share differently and nonlinearly. We empirically test the hypotheses by re-examining the trade–labor share nexus across 96 countries during 1970–2009, and we employ a partially linear model with fixed effect that allows a general functional form of trade variables to be estimated. Results are fairly consistent with our hypotheses, showing that while export (import) share significantly declines (raises) labor share, both effects diminish as the level of export or import share increases. The indicated nonlinear effects are significant and robust by controlling for related economic, social, and political factors. Also, we find a significant heterogeneous impact of export and import across OECD and non-OECD countries, with its implication also discussed.