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The Effect of Low-Wage Import Competition on U.S. Inflationary Pressure

Listed author(s):
  • Raphael Anton Auer
  • Andreas M. Fischer

This paper develops a new methodology to estimate the effect of low-wage import competition on U.S. producer prices. We first document that when low-wage countries grow, their exports to the United States increase most in labor-intensive sectors. Second, we demonstrate that the temporary and relative component of imports induced by labor intensity and output growth in low-wage countries is orthogonal to U.S. supply and demand shocks and can, therefore, be utilized to identify the causal impact of import competition on prices. In a panel covering 325 manufacturing industries from 1997 to 2006, we find that imports from nine low-wage countries are associated with strong downward pressure on U.S. prices. When these nations capture 1% U.S. market share, producer prices decrease by 3.1%, which is nearly fully accounted by a 2.4% increase in labor productivity and a 0.4% decrease in markups. Overall, we find that imports from the examined countries have decreased U.S. manufacturing PPI inflation by around two percentage points each year.

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Paper provided by Swiss National Bank in its series Working Papers with number 2008-18.

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Length: 51 pages
Date of creation: 2008
Handle: RePEc:snb:snbwpa:2008-18
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