Workers Beneath the Floodgates: Low-Wage Import Competition and Workers' Adjustment

Using employee-employer matched data for the period 1999 to 2010, I analyze the impact of a low-wage trade shock on manufacturing workers in a high-wage country, Denmark, and how they adjust to the shock over a decade. To derive causal effects I exploit the dismantling of import quotas on Chinese products with China’s accession to the WTO as a quasi-experiment and utilize within-industry, within-occupation heterogeneity in workers’ exposure to this trade shock. Showing significant negative effect on workers’ earnings and employment trajectories over the decade, the study identifies job instability in the service sector as a main adjustment friction which is concentrated among workers with manufacturing specific education and occupation. The results establish the importance of specific human capital in trade adjustment and provide evidence of skill upgrading at the individual level as workers re-build lost human capital through education.