When evaluating the benefits of trade policy, policymakers need to take into account the potentially negative effects on workers’ incomes

The rise of globalization in recent decades has brought about greater trade and other linkages between nations. While this increase in trade has brought major benefits, many are also concerned about its effects on workers’ wages as foreign goods affect local production. Pravin Krishna and Mine Zeynep Senses examine the effects of trade on the volatility of changes to workers permanent incomes, finding that the risk to these incomes has increased in the past two decades. They argue that these effects are significant, and that a sizeable social safety net may be needed to insure workers against this risk

Trade liberalization, firm heterogeneity, and wages : new evidence from matched employer-employee data

In this paper, the authors use a linked employer-employee database from Brazil to examine the impact of trade reform on the wages of workers employed at heterogeneous firms. The analysis of the data at the firm-level confirms earlier findings of a differential positive effect of trade liberalization on the average wages at exporting firms relative to non-exporting firms. However, this analysis of average firm-level wages is incomplete along several dimensions. First, it cannot fully account for the impact of a change in trade barriers on workforce composition especially in terms of unobservable (time-invariant) characteristics of workers (innate ability) and any additional productivity that obtains in the context of employment in the specific firm (match specific ability). Furthermore, the firm-level analysis is undertaken under the assumption that the assignment of workers to firms is random. This ignores the sorting of worker into firms and leads to a bias in estimates of the differential impact of trade on workers at exporting firms relative to non-exporting firms. Using detailed information on worker and firm characteristics to control for compositional effects and using firm-worker match specific effects to account for the endogenous mobility of workers, the authors find the differential effect of trade openness on wages in exporting firms relative to domestic firms to be insignificant. Consistent with the models of Helpman, Itskhoki, and Redding (2010) and Davidson, Matusz and Schevchenko (2008), they also find that the workforce composition improves systematically in exporting firms in terms of innate (time invariant) worker ability and in terms the quality of the worker-firm matches.Labor Markets,Microfinance,Free Trade,Trade Policy,Economic Theory&Research

International Trade and Labor Income Risk in the United States

This paper studies empirically the links between international trade and labor income risk faced by workers in the United States. We use longitudinal data on workers to estimate time-varying individual income risk at the industry level. We then combine our estimates of persistent labor income risk with measures of exposure to international trade to analyze the relationship between trade and labor income risk. Importantly, by contrasting estimates from various sub-samples of workers, such as those who switched to a different industry (or sector) with those who remained in the same industry throughout the sample, we study the relative importance of the different channels through which international trade affects individual income risk. Finally, we use these estimates to conduct a welfare analysis evaluating the benefits or costs of trade through the income risk channel. We find import penetration to have a statistically significant association with labor income risk in the United States, with economically significant welfare effects.

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.

Three essays in international economics.

The chapters in this dissertation deal broadly with issues related to outsourcing and financial crises. All three chapters are empirical in nature and utilize plant and/or firm level datasets. The second and third chapters are in the field of trade and labor economics; they focus on the main determinants and the labor market implications of outsourcing in the U.S. manufacturing sector. The fourth chapter is in the field of international finance and examines the impact of large devaluations on investment levels of Turkish firms. In the second chapter, I focus on the effects of outsourcing on conditional labor demand elasticities. I develop a theoretical model of outsourcing that formalizes this relationship and an empirical strategy that addresses the endogeneity of wages in the labor demand equation. Consistent with the predictions of the model, I find U.S. manufacturing plants operating in industries that heavily outsource experienced an increase in their labor demand elasticities during the 1980-1992 period. In 1992, this trend reversed. The model suggests that this finding can be attributed to a decline in the share of unskilled labor in total cost. The main purpose of the next chapter is to identify the determinants of a plant's decision to outsource. I focus primarily on the importance of labor costs as a determinant of outsourcing and examine whether its importance changes over time, as suggested by the model introduced in this chapter. I find that although the responsiveness of the demand for contract work to changes in labor costs decreased over time, labor costs continue to be an important determinant of outsourcing. The final chapter focuses on foreign currency denominated debt and its impact on the investment levels of credit-constrained firms, as one possible channel through which financial crises are transmitted to the real economy. I find that Turkish firms holding foreign currency denominated debt prior to devaluation had significant decreases in investment after the 1994 crisis, but not after the second crisis in 2001. For the 2001 crisis, results suggest that pre-crisis cash holdings were an important determinant of post-crisis investment levels, consistent with the major banking crisis that followed.Ph.D.EconomicsLabor economicsSocial SciencesUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/125496/2/3192774.pd

The Effects of Outsourcing on the Elasticity of Labor Demand

In this paper, I focus on the effects of outsourcing on conditional labor demand elasticities. I begin by developing a model of outsourcing that formalizes this relationship. I show that the increased possibility of outsourcing (modeled as a decline in foreign intermediate input prices and an increase in the elasticity of substitution between foreign and domestic intermediate inputs) should increase labor demand elasticities. I also show that, a decline in the share of unskilled labor, due either to skill biased technological change or to movement of unskilled labor intensive stages abroad, can work in the opposite direction and reverse the increasing trend in elasticities. I then test the predictions of the model using the U.S. Census Bureau’s Longitudinal Research Database (LRD). The instrumental variable approach used in the estimation of labor demand equations is the main methodological contribution of this paper. I directly address the endogeneity of wages in the labor demand equation by using average nonmanufacturing wages for each location and year as an instrumental variable for the plant-level wages in the manufacturing sector. The results support the main predictions of my model. U.S. manufacturing plants operating in industries that heavily outsource experienced an increase in their conditional labor demand elasticities during the 1980-1992 period. After 1992 elasticities began to decrease in outsourcing industries. This finding is consistent with the model which suggests that a decline in the share of unskilled labor in total cost could result in such a decrease in labor demand elasticities, precisely when the level of outsourcing is high. Estimates at the two-digit industry level provide further evidence in support of the hypothesis that heavily outsourcing industries experience greater increases in their elasticities.

The effects of offshoring on the elasticity of labor demand

In this paper, I use detailed plant-level data to analyze the relationship between offshoring and labor demand elasticities in the U.S. manufacturing sector during the 1972-2001 period. The results suggest that conditional demand elasticities for production workers are positively associated with increased exposure to offshoring both in the short-run and in the long-run. This relationship holds both for the unbalanced panel of plants and, for plants which continue their operations throughout the sample period. Controlling for skill biased technical change does not alter the magnitude or the significance of the estimated positive relationship between offshoring and labor demand elasticities.Trade and labor market interactions Economic integration Labor demand Offshoring