Too Much of a Good Thing? Exporters, Multiproduct Firms and Labor Market Imperfections

Carsten Eckel, Stephen R. Yeaple

NBER Working Paper No. 23834
Issued in September 2017, Revised in December 2017
NBER Program(s):International Trade and Investment

International trade is primarily conducted by large, multiproduct firms (MPFs) that pay above average wages and exhibit high productivity. In this paper we show that if firms can invest in management technologies for identifying worker skill then they will enjoy a form of market power in the labor market that artificially lowers their labor costs. This market failure results in excessive consumption of resources by large, productive exporting firms relative to the social optimum. Trade liberalization then has an ambiguous effect on aggregate welfare: lower trade costs increase access to foreign goods but also exacerbates the labor market distortion as resources are transferred to large firms. The model highlights the need to know why firms “excel” before drawing welfare conclusions regarding cross firm reallocations of resources.

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Document Object Identifier (DOI): 10.3386/w23834

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