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Trade liberalization, firm heterogeneity, and wages : new evidence from matched employer-employee data

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Author Info

  • Krishna, Pravin
  • Poole, Jennifer P.
  • Senses, Mine Zeynep

Abstract

In this paper, the authors use a linked employer-employee database from Brazil to examine the impact of trade reform on the wages of workers employed at heterogeneous firms. The analysis of the data at the firm-level confirms earlier findings of a differential positive effect of trade liberalization on the average wages at exporting firms relative to non-exporting firms. However, this analysis of average firm-level wages is incomplete along several dimensions. First, it cannot fully account for the impact of a change in trade barriers on workforce composition especially in terms of unobservable (time-invariant) characteristics of workers (innate ability) and any additional productivity that obtains in the context of employment in the specific firm (match specific ability). Furthermore, the firm-level analysis is undertaken under the assumption that the assignment of workers to firms is random. This ignores the sorting of worker into firms and leads to a bias in estimates of the differential impact of trade on workers at exporting firms relative to non-exporting firms. Using detailed information on worker and firm characteristics to control for compositional effects and using firm-worker match specific effects to account for the endogenous mobility of workers, the authors find the differential effect of trade openness on wages in exporting firms relative to domestic firms to be insignificant. Consistent with the models of Helpman, Itskhoki, and Redding (2010) and Davidson, Matusz and Schevchenko (2008), they also find that the workforce composition improves systematically in exporting firms in terms of innate (time invariant) worker ability and in terms the quality of the worker-firm matches.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5711.

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Date of creation: 01 Jun 2011
Date of revision:
Handle: RePEc:wbk:wbrwps:5711

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Related research

Keywords: Labor Markets; Microfinance; Free Trade; Trade Policy; Economic Theory&Research;

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References

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Citations

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Cited by:
  1. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2011. "The Empirics of Firm Heterogeneity and International Trade," NBER Working Papers 17627, National Bureau of Economic Research, Inc.
  2. Mario Macis & Fabiano Schivardi, 2012. "Exports and Wages: Rent Sharing, Workforce Composition or Returns to Skills?," EIEF Working Papers Series 1205, Einaudi Institute for Economics and Finance (EIEF), revised Mar 2012.
  3. Stephen Redding & Oleg Itskhoki & Marc-Andreas Muendler & Elhanan Helpman, 2012. "Trade and Inequality: From Theory to Estimation," 2012 Meeting Papers 135, Society for Economic Dynamics.
  4. Mehta, Aashish & Sun, Wei, 2013. "Does Industry Affiliation Influence Wages? Evidence from Indonesia and the Asian Financial Crisis," World Development, Elsevier, vol. 51(C), pages 47-61.

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