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Low-wage import competition, inflationary pressure, and industry dynamics in Europe

  • Auer, Raphael A.
  • Degen, Kathrin
  • Fischer, Andreas M.

Have exogenous changes in import competition from low-wage countries (LWCs) brought about changes in inflationary pressure in Europe? This paper examines whether labor-intensive exports from 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 document that LWC import competition is associated with strong price effects. More specifically, when Chinese and other Asian LWC exporters capture 1% of a European market, producer prices decrease by about 3%. 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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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 59 (2013)
Issue (Month): C ()
Pages: 141-166

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Handle: RePEc:eee:eecrev:v:59:y:2013:i:c:p:141-166
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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