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Low-Wage Import Competition, Inflationary Pressure,and Industry Dynamics in Europe

  • Raphael Anton Auer
  • Kathrin Degen
  • Andreas M. Fischer

What is the impact of import competition from low-wage countries (LWCs) on inflationary pressure in Europe? This paper examines whether labor-intensive exports from emerging Europe, Asia, and other global regions have a uniform impact on producer prices in Germany, France, Italy, Sweden, and the United Kingdom. In a panel covering 110 (4-digit) NACE industries from 1995 to 2008, instrumental variable estimations predict that LWC import competition is associated with strong price effects. More specifically, when LWC exporters capture 1% of European market share, producer prices decrease by about 3%. In contrast, no effect is present for import competition from low-wage countries in Central and Eastern Europe. Next, decomposing the mechanisms that underlie the LWC price effect on European industry, we show that import competition has a pronounced effect on average productivity and only a muted effect on wages. Owing to the exit of firms and the increase in productivity, LWC import competition is shown to have substantially reduced employment in the European manufacturing sector.

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Paper provided by Swiss National Bank in its series Working Papers with number 2011-09.

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Length: 66 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:snb:snbwpa:2011-09
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