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Low-Wage Import Competition, Inflationary Pressure,and Industry Dynamics in Europe

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  • Raphael Anton Auer
  • Kathrin Degen
  • Andreas M. Fischer

Abstract

What is the impact of import competition from low-wage countries (LWCs) on inflationary pressure in Europe? This paper examines whether labor-intensive exports from emerging Europe, Asia, and other global regions have a uniform impact on producer prices in Germany, France, Italy, Sweden, and the United Kingdom. In a panel covering 110 (4-digit) NACE industries from 1995 to 2008, instrumental variable estimations predict that LWC import competition is associated with strong price effects. More specifically, when LWC exporters capture 1% of European market share, producer prices decrease by about 3%. In contrast, no effect is present for import competition from low-wage countries in Central and Eastern Europe. Next, decomposing the mechanisms that underlie the LWC price effect on European industry, we show that import competition has a pronounced effect on average productivity and only a muted effect on wages. Owing to the exit of firms and the increase in productivity, LWC import competition is shown to have substantially reduced employment in the European manufacturing sector.

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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2011-09.

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Length: 66 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:snb:snbwpa:2011-09

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Keywords: intra-industry trade; comparative advantage; globalization;

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References

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Raphael A. Auer – Inflationsgefahr am Ende der Ära chinesischer Billigimporte
    by FTD.de in Wirtschaftswunder on 2011-03-03 12:00:00
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Cited by:
  1. Auer, Raphael & Mehrotra, Aaron, 2014. "Trade linkages and the globalisation of inflation in Asia and the Pacific," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9949, C.E.P.R. Discussion Papers.
  2. Lewis, John & Saleheen, Jumana, 2014. "Tailwinds from the East: how has the rising share of imports from emerging markets affected import prices?," Bank of England working papers, Bank of England 506, Bank of England.
  3. Flückiger, Matthias & Ludwig, Markus, 2013. "Chinese Export Competition, Declining Exports and Adjustments at the Industry and Regional Level in Europe," MPRA Paper 48878, University Library of Munich, Germany.
  4. Hirakata, Naohisa & Iwasaki, Yuto & Kawai, Masahiro, 2014. "Emerging Economies' Supply Shocks and Japan's Price Deflation: International Transmissions in a Three-Country DSGE Model," ADBI Working Papers, Asian Development Bank Institute 459, Asian Development Bank Institute.
  5. Carsten A Holz & Aaron Mehrotra, 2013. "Wage and price dynamics in a large emerging economy: The case of China," BIS Working Papers, Bank for International Settlements 409, Bank for International Settlements.
  6. Francesco Bianchi & Andrea Civelli, 2013. "Globalization and Inflation: Structural Evidence from a Time Varying VAR Approach," Working Papers, Duke University, Department of Economics 13-20, Duke University, Department of Economics.

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