Wage Effects of Trade Reform with Endogenous Worker Mobility

Pravin Krishna, Jennifer P. Poole, Mine Zeynep Senses

NBER Working Paper No. 17256
Issued in July 2011
NBER Program(s):   ITI

In this paper, we use a linked employer-employee database from Brazil to examine the impact of trade reform on the wages of workers employed at heterogeneous firms. Our analysis of data at the firm level confirms earlier findings of a differential positive effect of trade liberalization on average wages at exporting firms relative to non-exporting firms. However, the 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) worker characteristics (innate ability) and any additional productivity that results from employment in a 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 workers into firms and leads to a bias in estimates of the differential impact of trade on average wages at exporting firms relative to non-exporting firms. Using detailed information on worker and firm characteristics to control for compositional effects and allowing for the endogenous assignment of workers to firms due to time-invariant firm-worker match-specific productivity effects, we find an insignificant differential effect of trade openness on wages at exporting firms relative to domestic firms. We also show that workforce composition post-liberalization improves systematically in exporting firms in terms of the combination of innate worker ability and the quality of the worker-firm matches. Our findings confirm the importance of labor market matching mechanisms in determining the effects of trade policy changes on wages.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

This paper was revised on February 16, 2012

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX