Labor Decomposition: A Firm Level Analysis on Import Quality and Labor Demand

Structural changes due to global integration certainly affect the employment, productivity and profitability of firms. An interesting case reflects how firms use imports to replace certain stages in production of physical goods. The relevant question here is: if imports make up a substantial part of firms’ sales value, then can the import quality affect firms’ labor composition? The purpose of this paper is to analyze how high and low quality imports affect the labor composition in importing firms in Swedish manufacturing. Inter-firm variation shows that an increase in high (low) quality imports, on average, decreases the share of high-educated (low-educated) labor wages in total wages. Hence, a substitution effect. However, when intra-firm variation is considered the results are instead in favor of a complementary effect.