Research

Working papers

Trade Liberalization, Wage Rigidity, and Labor Market Dynamics with Heterogeneous Firms, 2024

with Elhanan Helpman and Oleg Itskhoki | [Slides]

Adjustment to trade liberalization is associated with substantial reallocation of labor across firms within sectors. This salient feature of the data is well captured by models of international trade with heterogeneous firms. In this paper, we reconsider the adjustment of firms and workers to changes in trade costs, explicitly accounting for labor market frictions and the entire adjustment path from an initial to a final steady-state. The transitional dynamics exhibit rich patterns, varying across firms that differ in productivity levels and across workers attached to these firms. High-productivity exporters expand employment on impact. However, among lower-productivity firms some close shop on impact, others fire some workers on impact and close shop at a later date, and still, other firms gradually reduce their labor force and stay in the industry. In these circumstances, jobs that pay similar wages ex-ante are not equally desirable ex-post, because after the trade shock, high-productivity incumbents pay higher wages and provide more job security than low-productivity incumbents. We calibrate the model and provide a quantitative assessment of the importance of various channels of adjustment. We find that gains from trade due to a decline in the consumer price index overwhelm losses from wage cuts, job destruction, and capital losses of incumbent firms, and that these losses increase with the extent of labor market frictions. Furthermore, we find that downward wage rigidity can be welfare-enhancing while generating a trade-off between the workers’ displacement rates and the labor income loss. Decomposition of dynamics gains of trade shows that although firms’ profit is decreasing in the minimum wage as firms are forced to fire more workers on impact, the total gains from trade can increase due to the reduction in labor income loss.

Work in progress

Human Capital Accumulation and the Long-Term Effects of Temporary Sectoral Shocks