Labor market power and the distorting effects of international trade |
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| Institution: | 1. Compass Lexecon, Spain;2. EIEF and CEPR, Italy;3. Bank of Italy, Italy;1. Geneva School of Economics and Management (GSEM), University of Geneva, Bd. du Pont d’Arve 40, 1211 Geneva 4, Switzerland;2. Department of Economics, University of Oxford, Manor Road, Oxford OX1 3UQ, United Kingdom;3. CEPR and CESifo;1. University of Pennsylvania, Pennsylvania, United States;2. Federal Reserve Bank of Atlanta, United States;3. Shanghai University of Finance and Economics, China;4. University of Oxford, Department of Economics, Manor Road, Oxford OX1 3UQ, United Kingdom |
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| Abstract: | This article examines how final product trade with China shapes and interacts with labor market imperfections that create market power in labor markets and prevent an efficient market outcome. I develop a framework for measuring such labor market power distortions in monetary terms and document large degrees of these distortions in Germany's manufacturing sector. Import competition only exerts labor market disciplining effects if firms, rather than employees, possess labor market power. Otherwise, increasing export demand and import competition both fortify existing distortions, which decreases labor market efficiency. This widens the gap between potential and realized output and thus diminishes classical gains from trade. |
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