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

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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 im- port 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. Decomposing the mechanisms that underlie the LWC price effect on European industry, we show that import competition has a pronounced effect on average productivity with only a muted effect on wages or margins. 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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Paper provided by Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 11.02.

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Length: 58 pages
Date of creation: Feb 2011
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Handle: RePEc:szg:worpap:1102

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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. 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.
  2. Auer, Raphael & Mehrotra, Aaron, 2014. "Trade linkages and the globalisation of inflation in Asia and the Pacific," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 172, Federal Reserve Bank of Dallas.
  3. 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.
  4. 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.
  5. Carsten A Holz & Aaron Mehrotra, 2013. "Wage and price dynamics in a large emerging economy: The case of China," BIS Working Papers 409, Bank for International Settlements.
  6. 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.

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