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The Impact of Trade Liberalization on Firms' Product and Labor Market Power

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  • Dobbelaere, Sabien

    (Vrije Universiteit Amsterdam)

  • Wiersma, Quint

    (Vrije Universiteit Amsterdam)

Abstract

This paper examines the impact of trade liberalization on firms' product and labor market power. We estimate the prevalence and intensity of firm-level price-cost markups and either wage markups or wage markdowns. We take the dependence between these model-consistent measures of product and labor market power explicitly into account. To identify the effect of trade shocks on product and labor market power, we exploit China's reductions in input and output tariffs upon its accession to the World Trade Organization. We find that trade liberalization has not switched firms away from exercising product and labor market power. Reducing tariffs on intermediate inputs has increased a firm's price-cost markup but decreased the degree of wage-setting power that it possesses, conditional on exercising product/labor market power. Finally, we find heterogeneous effects of trade liberalization on the intensity of firms' product and labor market power, giving insights into the true consequences of trade shocks.

Suggested Citation

  • Dobbelaere, Sabien & Wiersma, Quint, 2020. "The Impact of Trade Liberalization on Firms' Product and Labor Market Power," IZA Discussion Papers 12951, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp12951
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    More about this item

    Keywords

    price-cost markups; wage markups; wage markdowns; trade liberalization; tariffs;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions

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