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Trade, wages and productivity

  • Kristian Behrens

    ()

    (Department of Economics, Université du Québec à Montréal (UQAM), Canada
    CORE, Université catholique de Louvain, Belgium
    CIRPÉE, Canada)

  • Giordano Mion

    ()

    (National Bank of Belgium, Research Department
    LSE, Department of Geography, London, UK)

  • Yasusada Murata

    ()

    (Advanced Research Institute for the Sciences and Humanities (ARISH), Nihon University, Tokyo, Japan)

  • Jens Südekum

    ()

    (Mercator School of Management, Universität Duisburg-Essen, Germany
    Ruhr Graduate School of Economics, Germany
    IZA, Germany)

We develop a new general equilibrium model of trade with heterogeneous firms, variable demand elasticities and endogenously determined wages. Trade integration favours wage convergence, boosts competition, and forces the least efficient firms to leave the market, thereby affecting aggregate productivity. Since wage and productivity responses are endogenous, our model is well suited to studying the impact of trade integration on aggregate productivity and factor prices. Using Canada-US interregional trade data, we first estimate a system of theory-based gravity equations under the general equilibrium constraints generated by the model. Doing so allows us to measure 'border effects' and to decompose them into a 'pure' border effect, relative and absolute wage effects, and a selection effect. Using the estimated parameter values, we then quantify the impact of removing the Canada-US border on wages, productivity, mark-ups, the share of exporters, the mass of varieties produced and consumed, and thus welfare. Finally, we provide a similar quantification with respect to regional population changes.

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File URL: https://www.nbb.be/doc/oc/repec/reswpp/wp161en.pdf
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Paper provided by National Bank of Belgium in its series Working Paper Research with number 161.

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Length: 44 pages
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:nbb:reswpp:200903-23
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