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Firm Responses and Wage Effects of Foreign Demand Shocks with Fixed Labor Costs and Monopsony

Author

Listed:
  • Emmanuel Dhyne
  • Ayumu Ken Kikkawa
  • Toshiaki Komatsu
  • Magne Mogstad
  • Felix Tintelnot

Abstract

We quantify the firm responses and real wage effects of foreign demand shocks. We use Belgian microdata to construct firm-specific measures of demand shocks, which capture that firms pass on foreign demand shocks to domestic suppliers. Our estimates of firm responses to these shocks suggest that firms face upward-sloping labor supply curves and have sizable fixed labor costs. We specify a general equilibrium model with these features to quantify the aggregate effects of simulated tariff shocks on wages. We find that ignoring fixed labor costs substantially underestimates aggregate effects on wages, whereas incorporating upward-sloping labor supply appears less consequential.

Suggested Citation

  • Emmanuel Dhyne & Ayumu Ken Kikkawa & Toshiaki Komatsu & Magne Mogstad & Felix Tintelnot, 2025. "Firm Responses and Wage Effects of Foreign Demand Shocks with Fixed Labor Costs and Monopsony," American Economic Review, American Economic Association, vol. 115(12), pages 4328-4368, December.
    • Handle: RePEc:aea:aecrev:v:115:y:2025:i:12:p:4328-68
    DOI: 10.1257/aer.20220948
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    2. Dhyne, Emmanuel & Kikkawa, Ayumu Ken & Kong, Xianglong & Mogstad, Magne & Tintelnot, Felix, 2023. "Endogenous production networks with fixed costs," Journal of International Economics, Elsevier, vol. 145(C).
    3. Goes, Carlos & Lopez-Acevedo, Gladys & Robertson, Raymond, 2023. "Gender-Segmented Labor Markets and Trade Shocks," Policy Research Working Paper Series 10518, The World Bank.
    4. Nefs, Merten & van Haaren, Jeroen & van Oort, Frank, 2023. "The limited regional employment benefits of XXL-logistics centres in the Netherlands," Journal of Transport Geography, Elsevier, vol. 109(C).
    5. Pellet, Thomas & Tahbaz-Salehi, Alireza, 2023. "Rigid production networks," Journal of Monetary Economics, Elsevier, vol. 137(C), pages 86-102.
    6. Bijnens, Gert & Anyfantaki, Sofia & Colciago, Andrea & De Mulder, Jan & Falck, Elisabeth & Labhard, Vincent & Lopez-Garcia, Paloma & Meriküll, Jaanika & Parker, Miles & Röhe, Oke & Schroth, Joachim & , 2024. "The impact of climate change and policies on productivity," Occasional Paper Series 340, European Central Bank.
    7. Gene M. Grossman & Elhanan Helpman & Alejandro Sabal, 2023. "Resilience in Vertical Supply Chains," Working Papers 2023-03, Princeton University. Economics Department..
    8. Carlos G'oes & Gladys Lopez-Acevedo & Raymond Robertson, 2023. "Gender-Segmented Labor Markets and Foreign Demand Shocks," Papers 2301.09252, arXiv.org, revised Dec 2023.

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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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