Long‐run Lunacy,Short‐run Sanity: a Simple Model of Trade with Labor Market Turnover*

It is often argued that international trade is all about long‐run relationships. In this paper, we argue that this view is flawed when factor markets are characterized by turnover. Toward that end, we provide a simple dynamic model of trade with labor market turnover and show that the relationship between the economy's short‐run and long‐run behavior is more complex than in traditional trade models. For example, in the short run, the economy may produce outside of its long‐run frontier. We show that focusing on long‐run relationships can lead one to draw faulty policy conclusions, while focusing on its short‐run behavior restores sanity. The implication is that in the presence of factor market turnover, international trade issues can only be understood by studying the entire dynamic path of the economy. Long‐run relationships should be ignored.     

International Trade and Collective Bargaining Outcomes: Evidence from German Employer–Employee Data

In theoretical trade models with variable mark‐ups and collective wage bargaining, exposure to international markets might reduce the exporter wage premium. We test this prediction using linked German employer–employee data covering the years 1996–2007. To separate the rent‐sharing mechanism from assortative matching, we exploit individual worker information to construct profitability measures that are free of skill composition. Our results show that rent‐sharing is less pronounced in more export‐intensive firms or in more open industries. The exporter wage premium is highest for low‐productivity firms. In line with theory, these findings are unique to the subsample of plants covered by collective bargaining.     

The Growth Effects of National Patent Policies*

We construct a two‐country (innovative North and imitating South) model of product‐cycle trade, fully endogenous Schumpeterian growth, and national patent policies. A move towards harmonization based on stronger Southern intellectual property rights (IPR) protection accelerates the long‐run global rates of innovation and growth, reduces the North–South wage gap, and has an ambiguous effect on the rate of international technology transfer. Patent harmonization constitutes a suboptimal global‐growth policy. However, if the global economy is governed by a common patent policy regime, then stronger global IPR protection: (a) increases the rates of global innovation and growth; (b) accelerates the rate of international technology transfer; and (c) has no impact on the North–South wage gap.     

Globalization and inter‐industry wage differentials in China

This paper explores the relationship between globalization and inter‐industry wage differentials in China by using a two‐stage estimation approach. Taking advantage of a rich household survey dataset, this paper estimates the wage premium for each industry in the first stage conditional on individual worker and firm characteristics. Alternative measures of globalization are considered in the second stage: trade openness and capital openness. A disaggregation of trade into trade in final and intermediate goods shows that increases in import (export) shares of final goods reduce (increase) the wage premia significantly, whereas imports or exports of intermediate goods do not explain differences in industry wage premia. This finding is supported by stronger effects for final goods trade in coastal than noncoastal regions. Our results also show a positive relationship between capital openness and industrial wage premia, though this finding is less robust when potential endogeneity issues are allowed for.     

Wages distribution in Poland: The roles of privatization and international trade, 1992-96

This paper reports an investigation into the changes in the wage distribution in Poland in the first half of the 1990s. We concentrate on the effects of privatization and international trade. We show that the tendency towards increased dispersion in wages halted between 1992 and 1996, despite a rapid expansion in private-sector work. We also show that, during the same period, private-sector workers typically earned less than their state-sector counterparts on an hourly basis, and this gap widened. However, if one controls for experience, tenure and size of workplace, then there existed a small positive private-sector premium. On the effects of international trade, we find suggestive circumstantial evidence that the increase in trade with Western Europe raised wages and employment in manufacturing.     

Trade liberalization,firm entry,and income inequality

This paper examines the short‐ and long‐run effects of trade liberalization via tariff reductions on income inequality in an economy, which is characterized by an imperfectly competitive urban manufacturing sector and a perfectly competitive rural agricultural sector. Tariff reductions reduce domestic output in the importable urban manufacturing sector, leading to shifts of capital from the urban sector to the rural agricultural sector. This can narrow the wage gap between skilled and unskilled labor in the short run. However, the lowered capital cost attracts new firms, and subsequently excessive entry of firms, to the urban manufacturing sector. This firm entry effect can mitigate the favorable effect of tariff reductions on wage inequality in the long run. Empirical study confirms the findings.     

The J‐Curve: Evidence from Fiji*

This article provides new evidence on both long run and short‐run determinants of trade balance for Fiji and investigates evidence of J‐curve adjustment behaviour in the aftermath of a devaluation. We adopt a partial reduced form model that models the real trade balance directly as a function of the real exchange rate and real domestic and foreign incomes. Cointegration analysis is based on a recently developed autoregressive distributed lag approach—shown to provide robust results in finite samples. The long run elasticities are also estimated using a dynamic ordinary least squares approach and the Fully Modified Ordinary Least Squares (FM‐OLS) approach. Amongst our key results we find that there is a long‐run relationship between trade balance and its determinants. There is evidence of the J‐curve pattern; growth in domestic income affects Fiji’s trade balance adversely while foreign income improves it.     

International knowledge spillovers and wage inequality in developing countries

In this paper, international knowledge spillovers are incorporated in a horizontal innovation model, designed to explain the observed uncertain effects that openness of trade can have on wage inequality in small developing countries. Openness of trade can produce two different effects: an increase in the relative price of less-skilled labor-intensive products and a wider skill discrepancy due to knowledge spillovers from the more to less developed country. The former triggers a fall in the wage premium, while the latter widens the wage premium gap in a developing country. These two opposing forces explain the observed uncertain effects of openness to trade on wage inequality in developing countries.     

AN EMPIRICAL INVESTIGATION OF THE RELATIONS AMONG WAGE DIFFERENTIALS, PRODUCTIVITY GROWTH, AND TRADE

This article investigates the relations among productivity growth, wage differentials, and net exports in the United States. The time periods considered are the long run and the short run. Cointegration test results indicate that all the test variables are cointegrated. Therefore, productivity growth, wage differentials, and trade are all related in the long run. A short-run investigation of the relations among productivity growth, wage differentials, and trade is conducted within a vector error correction (VEC) estimation structure. The VEC tests indicate that, contrary to the prevailing view, productivity growth and trade have no impact on wage differentials in the short run. At the same time, it is apparent that wage differentials and trade have a positive and statistically significant impact on productivity growth in the United States in the short run.     

Two Tales on the Returns to Education: The Impact of Trade on Wages

This paper uses micro data from the Current Population Survey combined with data from the US International Trade Commission and Bureau of Economic Analysis to evaluate the impacts of international trade (import penetration and export intensiveness) on wages with a special focus on the returns to education. Consistent with the literature, our empirical analysis provides evidence that the wage rates of similarly skilled workers differ across net‐exporting, net‐importing, and nontradable industries. Our results add to the literature by showing that the wage gap usually found across importing and exporting industries vanishes for highly skilled workers (workers with college degree and beyond) when we control for the cross‐effect between international trade and education, but the wage gap due to international trade still persists for low‐skilled workers. This finding supports the view that education serves as an equalizer and counterbalances the adverse impact from import penetration on wages of highly skilled workers.     

International Outsourcing and the Sector Bias: New Empirical Evidence

Considering labor market effects of international outsourcing on more disaggregated industry levels, a sector bias appears showing that low skilled labor receives a wage premium when international outsourcing takes place in low skill‐intensive industries. However, there is no empirical evidence supporting this pattern. Applying a panel data analysis for Germany, this paper provides new empirical evidence for the existence of the sector bias of international outsourcing: significant results confirm the decreasing wage gap if international outsourcing takes place in low skill‐intensive industries. If international outsourcing takes place in high skill‐intensive industries, the wage gap increases.     

Manufacturing Skill‐biased Wage Inequality,Natural Resources and Institutions

We use an extensive dataset on occupational wages to measure the manufacturing skill premium and assess, for the first time, the influence of natural resources and institutional quality—in addition to traditional drivers—for advanced and less‐advanced countries and the full sample. The new findings, regarding 21 countries between 1988 and 2008 in the main panel estimations, suggest the premium of advanced countries rises with tertiary enrollment, net foreign direct investment (FDI) and institutional quality, and falls with centralized wage negotiations and geographically diffuse natural resource activities, mainly re‐exportation related. In less‐advanced countries, the premium rises with net FDI, scale effects, centralized wage negotiations and geographically concentrated natural resource activities (absorbing scarce skilled workers), and falls with trade, diffuse natural resource exploration (using mainly unskilled workers) and high‐technology exports, as emerging national low‐end technology industrial exporters may lower skill pay compared with foreign industrial exporters. In the full sample, the premium rises with scale effects, trade, institutional quality and concentrated natural resources, and falls with the relative skilled‐labor supply, centralized wage negotiations and diffuse natural resources. The results account for a wider diversity of situations compared with the previous studies.     

Skill premium in Portuguese manufacturing industries

The debate between the skill-biased technological change (SBTC) approach and the international trade (IT) explanation to obtain the best explanation for the wage gap between skilled and unskilled workers continues. In this article, we divide the Portuguese manufacturing industries into high-tech and low-tech and study the approach that best justifies the wage gap, for the period between 2007 and 2014. The results point out that the SBTC approach is the main explanation to the formation the wage gap between the labour force with tertiary education (skilled) and with secondary and primary education (unskilled).     

The selection of migrants and returnees in Romania

This paper uses census and survey data to identify the wage earning ability and the selection of recent Romanian migrants and returnees on observable characteristics. We construct measures of selection across skill groups and estimate the average and the skill‐specific premium for migration and return for three typical destinations of Romanian migrants after 1990. Once we account for migration costs, we find evidence that the selection and sorting of migrants are driven by different returns to skills in countries of destination. Our identification strategy for the effects of work experience abroad permits a cautious causal interpretation of the premium to return migration. This premium increases with migrants' skills and drives the positive selection of returnees relative to non‐migrants. Based on the compatibility of the results with rationality in the migration decisions, we simulate a rational‐agent model of education, migration and return. Our results suggest that for a source country like Romania relatively high rates of temporary migration might have positive long‐run effects on average skills and wages.     

Trade between symmetric countries,heterogeneous firms,and the skill premium

Abstract This paper examines the effects of trade liberalization between symmetric countries on the skill premium. I introduce skilled and unskilled labour in a model of trade with heterogeneous firms à la Melitz (2003) and assume a production technology such that more productive firms are more skill intensive. I show that the effects of trade liberalization on wage inequality crucially depend on the type of trade costs considered and on their initial size. While fixed costs of trade have a potentially non‐monotonic effect on the skill premium, a drop in variable trade costs unambiguously and substantially raises wage inequality.     

Productivity Shocks and Real Effective Exchange Rates

This paper provides new insights into the relationship between exchange rates and productivity developments for European Economies. We focus on the question whether productivity changes have a long‐run impact on real effective exchange rates for a large number of European economies. Focusing on a sample period running from 1995 until 2013, we adopt a cointegrated vector autoregressive approach and distinguish between long‐run equilibrium, short‐run dynamics and long‐run impact of shocks. Our findings show that for several industrialized economies, real effective exchange rates and labor productivity are not related over the long‐run. A possible explanation for this result is that wage developments do not reflect increases in labor productivity to a large degree, which prevents a transmission to the real effective exchange rate through the price channel. The results for Central and Eastern European Countries are more encouraging since a positive impact of labor productivity on real effective exchange rate is frequently observed.     

Downward nominal wage rigidity in Canada: Evidence against a “greasing effect”

The existence of downward nominal wage rigidity (DNWR) has often been used to justify a positive inflation target. It is traditionally assumed that positive inflation could “grease the wheels” of the labour market by putting downward pressure on real wages, easing labour market adjustments during a recession. A rise in the inflation target would attenuate the long‐run level of unemployment and hasten economic recovery after an adverse shock. Following Daly and Hobijn (2014), we re‐examine these issues in a model that accounts for precautionary motives in wage‐setting behaviour. We confirm that DNWR generates a long‐run negative relationship between inflation and unemployment, in line with previous contributions to the literature. However, we also find that the increase in the number of people bound by DNWR following a negative demand shock rises with the inflation target, offsetting the beneficial effects a higher inflation target has on closing the unemployment gap. As an implication, contrary to previous contributions that neglected precautionary behaviour, the speed at which unemployment returns back to pre‐crisis levels during recessions is relatively unaffected by variations in the inflation target.     

The Impact of Exporting and Export Destination on Manufacturing Wages: Evidence for Sub-Saharan Africa

This paper investigates wage effects of trade status of African firms. Using data for manufacturing firms, we find a positive overall association between individual earnings and export status. Moreover, the skill wage premium in exporting firms is significantly higher. These results are consistent with either trade inducing higher wages in the exporting country, or with more productive (higher wage) firms self‐selecting into exporting. The results are not robust, however, to disaggregation by export destination. Exporting to outside Africa generates a negative wage premium whereas exporting to African markets yields a positive premium in export firms of the exporting country. This suggests that there is a disciplining effect on the wages of exporting firms only when exporting is to more competitive markets.     

Global Innovation Races,Offshoring and Wage Inequality

In the 1970s and 1980s the US position as the global technological leader was increasingly challenged by Japan and Europe. In those years the US skill premium and residual wage inequality increased substantially. This paper presents a two‐region, quality‐ladder growth model where the lagging economy progressively catches up with the leader. As the innovation gap closes, the advanced country experiences fiercer foreign technological competition that forces its firms to innovate more. Faster technical change increases the skill premium and residual inequality. Offshoring production and innovation plays a key role in shaping the link between international competition and inequality.     

Foreign ownership wage premia in emerging economies

In this article we examine the relationship between wages, labour productivity and ownership using a linked employer–employee dataset covering a large fraction of the Czech labour market in 2006. We distinguish between different origins of ownership and study wage and productivity differences. The raw wage differential between foreign and domestically‐owned firms is about 23 percent. The empirical analysis is carried out on both firm‐ and individual‐level data. A key finding is that industry, region and notably human capital explain only a small part of the foreign–domestic ownership wage differential. Both white and blue collar workers as well as skilled and unskilled employees obtain a foreign ownership wage premium. Foreign ownership premia are more prevalent in older and less technologically advanced firms. Joint estimation of productivity and wage equations show that, controlling for human capital, the difference in productivity is about twice as large as the wage differential. Overall, results indicate that the international firms share their rents with their employees.