Globalisation and union opposition to technological change

Trade unions have a rational incentive to oppose the adoption of labour-saving technology when labour demand is inelastic and unions care much for employment relative to wages. Trade liberalisation typically increases trade union technology opposition. These conclusions are reached in a model of unionised international duopoly with two-way trade. We also find that the incentive for technology opposition is stronger in the more technologically advanced country and in the country with the larger home market, complementing earlier explanations for technological catch-up and leapfrogging.     

Trade, wages, and the political economy of trade protection: evidence from the Colombian trade reforms

Worker industry affiliation plays a crucial role in how trade policy affects wages in many trade models. Yet, most research has focused on how trade policy affects wages by altering the economy-wide returns to a specific worker characteristic (i.e., skill or education) rather than through worker industry affiliation. This paper exploits drastic trade liberalizations in Colombia in the 1980s and 1990s to investigate the relationship between protection and industry wage premiums. We relate wage premiums to trade policy in an empirical framework that accounts for the political economy of trade protection. Accounting for time-invariant political economy factors is critical. When we do not control for unobserved time-invariant industry characteristics, we find that workers in protected sectors earn less than workers with similar observable characteristics in unprotected sectors. Allowing for industry fixed effects reverses the result: trade protection increases relative wages. This positive relationship persists when we instrument for tariff changes. Our results are in line with short- and medium-run models of trade where labor is immobile across sectors or, alternatively, with the existence of industry rents that are reduced by trade liberalization. In the context of the current debate on the rising income inequality in developing countries, our findings point to a source of disparity beyond the well-documented rise in the economy-wide skill premium: because tariff reductions were proportionately larger in sectors employing a high fraction of less-skilled workers, the decrease in the wage premiums in these sectors affected such workers disproportionately.     

(De)Unionization,Trade Liberalization and Selection

The effects of union bargaining power and trade liberalization on industry selection are analysed within a two‐country heterogeneous‐firm model with firm‐specific unions and inter‐country asymmetries in size and union power. Union bargaining power is shown to have more nuanced effects on efficiency and welfare than what typically suggested by conventional wisdom. While the higher wages resulting from an unfavourable union power differential harm firms' competitiveness, by reinforcing standard market access mechanisms, they give rise to aggregate demand effects that can act as a catalyst for industry and result in a pro‐variety effect.     

Trade, offshoring, and the invisible handshake

We study the effect of globalization on the volatility of wages and worker welfare in a model in which risk is allocated through long-run employment relationships (the ‘invisible handshake’). Globalization can take two forms: international integration of commodity markets (i.e., free trade) and international integration of factor markets (i.e., offshoring). In a two-country, two-good, two-factor model we show that free trade and offshoring have opposite effects on rich-country workers. Free trade hurts rich-country workers, while reducing the volatility of their wages; by contrast, offshoring benefits them, while raising the volatility of their wages. We thus formalize, but also sharply circumscribe, a common critique of globalization.     

UNIONIZATION AND STRATEGIC TRADE POLICY

This article examines the effect of unionization on welfare and trade policy using a model of duopolists competing in a third market. The traditional result that the presence of a union necessitates a stronger strategic trade policy to reach the optimal level of welfare hinges on the mode of competition. With Bertrand duopolists, a union can be welfare-improving; it can also lead to a weaker trade policy, or even reverse the direction of the optimal policy. Our results highlight the importance for trade policy of understanding the nature of firm behavior and the institutional features of the labor market.     

Trade and imperfect competition in general equilibrium

This paper employs a multi-industry general equilibrium model of oligopolistic competition, free market entry and trade in which capital is used to establish firms and labor is used for production. We show that both absolute and relative endowments matter for the pattern of trade. We demonstrate that market entry to each industry is either too excessive or too moderate while the effect on firm size is ambiguous. If countries are sufficiently symmetric, trade will increase the wage–rental ratio in both countries. Furthermore, trade will increase per-capita consumption in capital-intensive industries and reduce it in labor-intensive industries. Nevertheless, trade will be mutually welfare-improving under relatively mild conditions.     

A theory of the currency denomination of international trade

The currency denomination of international trade has significant macroeconomic and policy implications. In this paper we solve for the optimal invoicing choice by integrating this microeconomic decision at the level of the firm into a general equilibrium open economy model. Strategic interactions between firms play a critical role. We find that the less competition firms face in foreign markets, as reflected in market share and product differentiation, the more likely they will price in their own currency. We also show that when a set of countries forms a monetary union, the new currency is likely to be used more extensively in trade than the sum of the currencies it replaces.     

Trade liberalization,division of labor and welfare under oligopoly

Incorporating explicitly division of labor into a two-country general oligopolistic equilibrium model, we examine the effects of trade liberalization on firm productivity and welfare. We show that a tariff reduction increases the firm productivity of the trading industries but decreases that of the non-trading industries. An expansion of the trading industries, in contrast, decreases the firm productivity of both the trading and non-trading industries. We then find that a tariff reduction necessarily reduces welfare while the welfare effect of expansion of trading industries is ambiguous.     

Lobbying costs and trade policy

We study how endogenous lobbying costs influence trade policies. Although in practice lobbying expenditures far exceed campaign contributions, the literature on the political economy of trade policy has focused on the latter. In this paper we develop a model in which informational lobbying costs play a role in determining the structure of protection. In the model, special interest groups can choose to send a signal to the policymaker regarding some information they possess, and the policymaker observes the signal before setting the trade policies. We find that lobbying expenditures directly affect the equilibrium policies. In order to test the predictions of the model we collected data on lobbying expenditures from the Center for Responsible Politics as well as data on trade and industry characteristic variables for the United States from other sources. We perform a structural estimation of the equilibrium trade policies and find support for our model. The empirical evidence indicates that lobbying expenditures play an important role in explaining the variation of protection across sectors. Moreover, the model leads to considerably lower and more reasonable estimates of the weight that the government places on social welfare relative to political contributions.     

Wage Effects of Trade Reform with Endogenous Worker Mobility

In this paper, we use a linked employer–employee database from Brazil to evaluate the wage effects of trade reform. With an aggregate (firm-level) analysis of this question, we find that a decline in trade protection is associated with an increase in average wages in exporting firms relative to domestic firms, consistent with earlier studies. However, using disaggregated, employer–employee level data, and allowing for the endogenous assignment of workers to firms due to match-specific productivity, we find that the premium paid to workers at exporting firms is economically and statistically insignificant, as is the differential impact of trade openness on the wages of workers at exporting firms relative to otherwise identical workers at domestic firms. We also find that workforce composition improves systematically in exporting firms, in terms of the combination of worker ability and the quality of worker–firm matches, post-liberalization. These results stand in stark contrast to the findings reported in many earlier studies and underscore the importance of endogenous matching and, more generally, non-random labor market allocation mechanisms, in determining the effects of trade policy changes on wages.     

Product and process productivity: Implications for quality choice and conditional exporter premia

We develop a model of international trade with two dimensions of firm heterogeneity. The first dimension is “process productivity”, which is how we denote the standard concept of productivity as modeled in the literature. The second one is “product productivity”, defined as firms' ability to develop high-quality products spending small fixed outlays. The distinction between these two sources of productivity, together with the assumption that iceberg trade costs decrease with quality, delivers various conditional exporter premia as theoretical predictions. Conditional on size, exporters sell higher quality products, charge higher prices, pay higher input prices and higher wages, and use capital more intensively. Some of these predictions had already been documented in the empirical literature but lacked a theoretical framework for properly interpreting them. We conduct systematic tests of these predictions using manufacturing establishment data for India, the U.S., Chile, and Colombia, and find strong support for the model.     

Managerial Firms,Entry, and Switching Costs

Empirical evidence shows that switching costs are important in many industries. We analyze the welfare effects of entry into markets with switching costs when firms can be run by managers and the entrant may be partially foreign-owned. We find that with profit-maximizing firms, the welfare effect of entry depends crucially on the ownership of the entrant firm. We also show that entry is less likely with managerial firms than it is with profit-maximizing firms. In the latter case, entry always reduces welfare if the share of the entrant firm owned by foreign investors is high. However, with managerial firms, entry always increases welfare.     

Fairness,trade, and inequality

We develop a model of international trade between two symmetric countries that features inter-group inequality between managers and workers, and also intra-group inequality within each of those two groups. Individuals are heterogeneous with respect to their managerial ability, and firms run by more able managers have a higher productivity level and make higher profits. There is rent sharing at the firm level due to fair wage preferences of workers, and hence firms with higher profits pay higher wages in equilibrium in order to elicit their workers' full effort. We show that in this framework international trade leads to a self-selection of the best firms into export status, with exporting firms having to pay a wage premium. Aggregate welfare increases, but there is also larger inequality along multiple dimensions: Involuntary unemployment and income inequality between managers and workers increase, and so does inequality within these two subgroups of individuals, as measured by the respective Gini coefficients.     

FDI in post-production services and product market competition

Post-production services, such as sales, distribution, and maintenance, comprise a crucial element of business activity. We explore an international duopoly model in which a foreign firm has the option of outsourcing post-production services to its domestic rival or providing those services by establishing its own facilities through FDI. We demonstrate that trade liberalization in goods may hurt domestic consumers and lower world welfare, and that the negative welfare impacts are turned into positive ones if service FDI is also liberalized. This finding yields important policy implications, given the reality that the progress of liberalization in service sectors is still limited.     

Foreign direct investment and customs union: Incentives for multilateral tariff cooperation over free trade

The present article examines the implications of a customs union (CU) on the pattern of tariffs, welfare and the prospects for free trade when the non-member firm has an incentive to engage in foreign direct investment (FDI). First, I show that upon the formation of a bilateral CU, the non-member firm has greater incentives to engage in FDI. However, when FDI becomes a feasible entry option for the non- member firm under a CU, member countries have incentives to strategically induce export over FDI by lowering their joint external tariff. When fixed set-up cost of FDI is sufficiently low, this tariff falls below Kemp–Wan tariff and CU leads to a Pareto improvement relative to no agreement. Moreover, using an infinite repetition of the one-shot tariff game under a CU, I show that the presence of FDI incentive of the non-member firm makes the member countries more willing to cooperate multilaterally over free trade while the opposite is true for the non-member country. Finally, I find that, unless fixed cost of having an additional plant is sufficiently low, multilateral cooperation over free trade is easier to sustain when FDI incentive is present.     

Efficient bargaining,welfare and strategic export policy

We present an efficient bargaining model and analyse the welfare effects of unionization, where rival exporting governments employ strategic export policy. The domestic firm is unionized and conducts a Nash bargain with its union to determine wage and employment. The union may be wage oriented, wage neutral or employment oriented. The foreign firm is non-unionized. Stability of the reaction function equilibrium in policy space is sufficient for the following results: (i) domestic welfare increases with the degree of wage orientation; (ii) an increase in the union's bargaining power leads to higher (lower) domestic welfare if the union is wage (employment) oriented; (iii) if the domestic social marginal cost of labour is less than or equal to the foreign marginal cost, domestic market share is higher under wage orientation.     

Welfare and trade elasticity with multinational production

We explore welfare properties in a firm heterogeneity model with multinational production and export. The presence of multinational production plays a crucial role in delivering a partial trade elasticity of total sales by exporters and affiliates that is no longer constant, and depends on both supply and demand parameters. We then analyse counterfactual scenarios. Multinational production with intra-firm trade increases welfare gains by up to 4% with respect to a model with only export and no truncation. Multinational production à la Helpman et al. (American Economic Review, 2004, 94 , 300) generates the largest welfare gains from liberalisation.     

International trade and macroeconomic dynamics with labor market frictions

This paper studies how labor market frictions affect the consequences of trade integration in a two-country dynamic stochastic general equilibrium model with heterogeneous firms and endogenous producer entry. Two main results emerge. First, trade integration is beneficial for welfare by inducing higher productivity, but unemployment can temporarily rise during the transitional adjustment. Labor market rigidities reduce gains from trade, even though they can mitigate short-run employment losses. Second, consistent with the data, the model predicts that stronger trade linkages lead to increased business cycle synchronization. The strength of this effect, however, depends on the labor market characteristics of the integrating partners.     

Foreign influence and welfare

How do foreign interests influence policy? How are trade policies and the viability of trade agreements affected? What are the welfare implications of such foreign influence? In this paper we develop a model of foreign influence and apply it to the study of optimal tariffs. In a two-country voting model of electoral competition, we allow the incumbent party in each country to take costly actions that probabilistically affect the electoral outcome in the other country. We show that policies end up maximizing a weighted sum of domestic and foreign welfare. Using this formulation we show that foreign influence increases aggregate world welfare when there are no other means of alleviating the externalities that arise from cross-border effects of policies. In contrast, when countries can engage in international agreements, foreign influence can prove harmful as powerful countries may refuse to offer concessions. We also show that power imbalances are particularly detrimental to cooperation when they are positively correlated with economic size.     

The welfare and employment effects of trade and factor taxes with variable factor supply

This paper develops a general trade model with many traded goods, many internationally mobile factors, and with endogenous labor supply. Within this framework, the employment and welfare effects of taxes on trade, on wages and on the returns of the internationally mobile factors are examined. The employment maximizing and the first- and second-best tax structures are determined. The analysis identifies the conditions under which variable labor supply increases the welfare cost of a trade and a capital tax, and demonstrates the need for joint determination of taxes on trade and on the returns of factors in variable domestic supply.