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

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

Abstract

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.

Suggested Citation

  • Auer, Raphael A. & Degen, Kathrin & Fischer, Andreas M., 2013. "Low-wage import competition, inflationary pressure, and industry dynamics in Europe," European Economic Review, Elsevier, vol. 59(C), pages 141-166.
  • Handle: RePEc:eee:eecrev:v:59:y:2013:i:c:p:141-166
    DOI: 10.1016/j.euroecorev.2012.11.007
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    More about this item

    Keywords

    Inflation; Intra-industry trade; Low-wage import competition;

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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