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The impact of trade and technology on wage components

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  • Borrs, Linda
  • Knauth, Florian

Abstract

We use a large sample of German workers to analyze the effect of low-wage competition with China and Eastern Europe (the East) on the wage structure within German manufacturing industries. Utilizing the method by Abowd et al. (1999), we decompose wages into firm and worker components. We find that the rise of market access and competitiveness of the East has a substantial impact on the dispersion of the worker wage component and in part on positive assortative matching. Trade fails to explain changes in the firm wage premium. The rising dispersion in worker-specific wages can be attributed to increasing skill premia and to changes in the extensive margin of the workforce, leading to a wage polarization for the remaining within-industry workers. We also account for technological change by considering how many routine-intensive jobs are substituted within an industry. The more routine jobs are cut, the higher is the effect on wage inequality, especially on the dispersion of worker-specific wages. Overall, trade explains up to 19% of the recent increase in wage inequality and slightly exceeds the technology effect that accounts for approximately 17%.

Suggested Citation

  • Borrs, Linda & Knauth, Florian, 2016. "The impact of trade and technology on wage components," DICE Discussion Papers 241, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    • Handle: RePEc:zbw:dicedp:241
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    Cited by:

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    2. Anna Goeddeke & Justus Haucap & Annika Herr & Christian Wey, 2018. "Flexibility in Wage Setting Under the Threat of Relocation," LABOUR, CEIS, vol. 32(1), pages 1-22, March.
    3. Céline Bonnet & Jan Philip Schain, 2020. "An Empirical Analysis Of Mergers: Efficiency Gains And Impact On Consumer Prices," Journal of Competition Law and Economics, Oxford University Press, vol. 16(1), pages 1-35.
    4. Brunner, Daniel & Heiss, Florian & Romahn, André & Weiser, Constantin, 2017. "Reliable estimation of random coefficient logit demand models," DICE Discussion Papers 267, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    5. Nolan, Brian & Richiardi, Matteo & Valenzuela, Luis, 2018. "The Drivers of Inequality in Rich Countries," MPRA Paper 89806, University Library of Munich, Germany.
    6. Dyballa, Katharina & Kraft, Kornelius, 2018. "Foreign Competition and Executive Compensation in the Manufacturing Industry: A Comparison between Germany and the U.S," IZA Discussion Papers 11713, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    wage decomposition; wage inequality; globalization; gravity;
    All these keywords.

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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