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Does It Matter What We Trade? Trade and Industrial Policies When Labor Markets Don't Clear


  • William T. Dickens


In efficiency wage models firms set employment so that the value of the marginal revenue product of labor (VMRPL) equals the wage. If the payment of efficiency wages results in inter-industry wage differences for comparable workers there exist welfare enhancing industrial and trade policies which shift employment from low to high wage industries. Previous attempts to measure the potential impact of such policies have assumed that wages equal the VMRPL, but not all explanations for inter-industry wage differences have that property. This paper argues, from the evidence on inter-industry wage differences that rent-sharing/extraction models should be preferred to other explanations. However, such models do not all have the property that wages equal the VMRPL. In the model presented VNRPL is set equal to the opportunity cost of labor so policies to shift employment to high wage industries would be of no value. Further, the empirical work that has been done to assess the importance of labor market distortions for trade and industrial policy is inapplicable if such models are the correct explanation for inter-industry wage differences. A rent-extraction model that takes into account workers' limited information about the profitability of the company they work for is developed. In that model high wage industries have high VPL so policies to shift employment to high wage industries are appropriate and past empirical studies of the effects of trade and industrial policy are approximately correct.

Suggested Citation

  • William T. Dickens, 1990. "Does It Matter What We Trade? Trade and Industrial Policies When Labor Markets Don't Clear," NBER Working Papers 3285, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3285
    Note: LS

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    References listed on IDEAS

    1. Johnson, George E, 1990. "Work Rules, Featherbedding, and Pareto-optimal Union-Management Bargaining," Journal of Labor Economics, University of Chicago Press, vol. 8(1), pages 237-259, January.
    2. Brown, James N & Ashenfelter, Orley, 1986. "Testing the Efficiency of Employment Contracts," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 40-87, June.
    3. Card, David, 1986. "Efficient Contracts with Costly Adjustment: Short-run Employment Determination for Airline Mechanics," American Economic Review, American Economic Association, vol. 76(5), pages 1045-1071, December.
    4. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-293, March.
    5. William T. Dickens & Lawrence F. Katz, 1987. "Inter-Industry Wage Differences and Theories of Wage Determination," NBER Working Papers 2271, National Bureau of Economic Research, Inc.
    6. William T. Dickens, 1986. "Wages, Employment and the Threat of Collective Action by Workers," NBER Working Papers 1856, National Bureau of Economic Research, Inc.
    7. Assar Lindbeck & Dennis J. Snower, 1989. "The Insider-Outsider Theory of Employment and Unemployment," MIT Press Books, The MIT Press, edition 1, volume 1, number 026262074x, January.
    8. Alan B. Krueger & Lawrence H. Summers, 1986. "Reflections on the Inter-Industry Wage Structure," NBER Working Papers 1968, National Bureau of Economic Research, Inc.
    9. Lindbeck, Assar & Snower, Dennis J, 1986. "Wage Setting, Unemployment, and Insider-Outsider Relations," American Economic Review, American Economic Association, vol. 76(2), pages 235-239, May.
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