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Trade, wages and productivity

  • Kristian Behrens
  • Giordano Mion
  • Yasusada Murata
  • Jens Südekum

We develop a new general equilibrium model of monopolistic competition with heterogeneous firms, variable demand elasticity and multiple asymmetric regions, in which trade integration induces wage and productivity changes. Using Canada-US interregional trade data, we structurally estimate a theory-based gravity equation system featuring endogenous wages and productivity. Given the estimated parameter values, we first decompose border effects into a pure border effect, relative and absolute wage effects, and a selection effect. We then quantify the impacts of removing the trade distortions generated by the Canada-US border on regional market aggregates such as wages, productivity, markups, the mass of varieties produced and consumed, as well as welfare. Last, we extend the counterfactual analysis to the firm level by generating productivity distributions and their changes via simulation.

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File URL: http://eprints.lse.ac.uk/28609/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 28609.

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Length: 47 pages
Date of creation: 2009
Handle: RePEc:ehl:lserod:28609
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