Hostname: page-component-cd9895bd7-hc48f Total loading time: 0 Render date: 2024-12-25T06:59:50.697Z Has data issue: false hasContentIssue false
  • English
  • Français

Trade Liberalization and Labor Market Institutions

Published online by Cambridge University Press:  05 May 2021

Leonardo Baccini Open the ORCID record for Leonardo Baccini [Opens in a new window] ,
Mattia Guidi Open the ORCID record for Mattia Guidi [Opens in a new window] ,
Arlo Poletti Open the ORCID record for Arlo Poletti [Opens in a new window]  and
Aydin B. Yildirim Open the ORCID record for Aydin B. Yildirim [Opens in a new window]
Get access

Abstract

While the firm-level distributional consequences of market liberalization are well understood, previous studies have paid only limited attention to how variations in domestic institutions across countries affect the winners and losers from opening up to trade. We argue that the presence of coordinated wage-bargaining institutions, which impose a ceiling on wage increases, and state-subsidized vocational training, which creates a large supply of highly skilled workers, generate labor market frictions. Upward wage rigidity, in particular, helps smaller firms weather the rising competition and increasing labor costs triggered by trade liberalization. We test this hypothesis using a firm-level data set of European Union countries, which includes more than 800,000 manufacturing firms between 2003 and 2014. We find that, for productive firms, gains from trade are 20 percent larger in countries with liberal market economies than they are in coordinated market economies. Symmetrically, less productive firms in coordinated market economies experience significantly smaller revenue losses compared to liberal market economies. We show that both the presence of an institutionalized wage ceiling and the availability of subsidized vocational training are key mechanisms for reducing the reallocation of revenue from unproductive to productive firms in coordinated market economies compared to liberal market economies. In line with our theory, we find that wages and employment in liberalized industries increase differentially across both types of labor markets. Finally, we provide suggestive evidence that trade liberalization triggers a differential demand for redistribution at the individual level across different labor markets, which is in line with our firm-level analysis.

Keywords

Trade liberalizationlabor institutionsheterogeneous firmswageEU
Type
Research Article
Information
International Organization , Volume 76 , Issue 1 , Winter 2022 , pp. 70 - 104
Copyright
Copyright © The IO Foundation 2021

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Addison, John T., Schnabel, Claus, and Wagner, Joachim. 2007. The (Parlous) State of German Unions. Journal of Labor Research 28 (1):3–18.Google Scholar
Alt, James, and Iversen, Torben. 2017. Inequality, Labor Market Segmentation, and Preferences for Redistribution. American Journal of Political Science 61 (1):21–36.CrossRefGoogle Scholar
Amiti, Mary, and Konings, Jozef. 2007. Trade Liberalization, Intermediate Inputs, and Productivity: Evidence from Indonesia. American Economic Review 97 (5):1611–38.CrossRefGoogle Scholar
Babecký, Jan, Du Caju, Philip, Kosma, Theodora, Lawless, Martina, Messina, Juliàn, and Rõõm, Tairi. 2009. The Margins of Labor Cost Adjustments: Survey Evidence from European Firms. Working Paper No. 1164, European Central Bank.CrossRefGoogle Scholar
Baccini, Leonardo, Dür, Andreas, and Elsig, Manfred. 2018. Intra-Industry Trade, Global Value Chains, and Preferential Tariff Liberalization. International Studies Quarterly 62 (2):329–40.CrossRefGoogle Scholar
Baccini, Leonardo, Pinto, Pablo M., and Weymouth, Stephen. 2017. The Distributional Consequences of Preferential Trade Liberalization: Firm-Level Evidence. International Organization 71 (2):373–95.CrossRefGoogle Scholar
Ballard-Rosa, Cameron, Malik, Mashail, Rickard, Stephanie, and Scheve, Kenneth. 2017. The Economic Origins of Authoritarian Values: Evidence from Local Trade Shocks in the United Kingdom. Working paper, University of North Carolina, Chapel Hill.Google Scholar
Bernard, Andrew B., Eaton, Jonathan, Jensen, J. Bradford, and Kortum, Samuel. 2003. Plants and Productivity in International Trade. American Economic Review 93 (4):1268–90.CrossRefGoogle Scholar
Bernard, Andrew B., Bradford Jensen, J., Redding, Stephen J., and Schott, Peter K.. 2012. The Empirics of Firm Heterogeneity and International Trade. Annual Review of Economics 4 (1):283–313.CrossRefGoogle Scholar
Betz, Timm. 2017. Trading Interests: Domestic Institutions, International Negotiations, and the Politics of Trade. Journal of Politics 79 (4):1237–52.CrossRefGoogle Scholar
Bureau van Dijk. 2017. Amadeus Database. Available at <https://amadeus.bvdinfo.com>..>Google Scholar
Cameron, David. 1978. The Expansion of the Public Economy: A Comparative Analysis. American Political Science Review 72 (4):1243–61.CrossRefGoogle Scholar
Colantone, Italo, and Stanig, Piero. 2018a. The Trade Origins of Economic Nationalism: Import Competition and Voting Behavior in Western Europe. American Journal of Political Science 62 (4):936–53.CrossRefGoogle Scholar
Colantone, Italo, and Stanig, Piero. 2018b. Global Competition and Brexit. American Political Science Review 112 (2):201–18.CrossRefGoogle Scholar
Culpepper, Pepper D. 2008. The Politics of Common Knowledge: Ideas and Institutional Change in Wage Bargaining. International Organization 62 (1):1–33.CrossRefGoogle Scholar
Culpepper, Pepper D., and Thelen, Kathleen. 2008. Institutions and Collective Actors in the Provision of Training: Historical and Cross-National Comparisons. In Skill Formation: Interdisciplinary and Cross-National Perspectives, edited by Mayer, Karl Ulrich and Solga, Heike, 21–49. Cambridge University Press.CrossRefGoogle Scholar
Cusack, Thomas, Iversen, Torben, and Rehm, Philipp. 2006. Risk at Work: The Demand and Supply Sides of Government Redistribution. Oxford Review of Economic Policy 22 (3):365–89.CrossRefGoogle Scholar
Dean, Adam. 2016. From Conflict to Coalition: Profit-Sharing Institutions and the Political Economy of Trade. Cambridge University Press.CrossRefGoogle Scholar
Estevez-Abe, Margarita, Iversen, Torben, and Soskice, David. 2001. Social Protection and the Formation of Skills: A Reinterpretation of the Welfare State. In Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, edited by Hall, Peter A. and Soskice, David, 145–83. Oxford University Press.CrossRefGoogle Scholar
Franz, Wolfgang, and Pfeiffer, Friedhelm. 2006. Reasons for Wage Rigidity in Germany. Labour 20 (2):255–84.CrossRefGoogle Scholar
Franzese, Robert, and Hall, Peter. 1999. Institutional Dimensions of Coordinating Wage-Bargaining and Monetary Policy. In Unions, Employers, and Central Banks: Wage Bargaining and Macroeconomic Policy in an Integrating Europe, edited by Iversen, Torben, Pontusson, Jonas, and Soskice, David, 173–204. Cambridge University Press.Google Scholar
Gingrich, Jane. 2019. Did State Responses to Automation Matter for Voters? Research and Politics 6 (1):1–9.CrossRefGoogle Scholar
Hainmueller, Jens, and Hiscox, Michael J.. 2006. Learning to Love Globalization: Education and Individual Attitudes Toward International Trade. International Organization 60 (2):469–98.CrossRefGoogle Scholar
Hall, Peter A., and Gingerich, Daniel W.. 2009. Varieties of Capitalism and Institutional Complementarities in the Political Economy: An Empirical Analysis. British Journal of Political Science 39 (3):449–82.CrossRefGoogle Scholar
Hall, Peter A., and Soskice, David. 2001a. An Introduction to Varieties of Capitalism. In Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, edited by Hall, Peter A. and Soskice, David, 1–68. Oxford University Press.CrossRefGoogle Scholar
Hall, Peter A., and Soskice, David, eds. 2001b. Varieties of Capitalism: The Institutional Foundations of Comparative Advantage. Oxford University Press.CrossRefGoogle Scholar
Hancké, Bob, Rhodes, Martin, and Thatcher, Mark, eds. 2007. Beyond Varieties of Capitalism: Conflict, Contradiction, and Complementarities in the European Economy. Oxford University Press.CrossRefGoogle Scholar
Hays, Jude. 2009. Globalization and the New Politics of Embedded Liberalism. Oxford University Press.CrossRefGoogle Scholar
Hays, Jude C., Ehrlich, Sean D., and Peinhardt, Clint. 2005. Government Spending and Public Support for Trade in the OECD: An Empirical Test of the Embedded Liberalism Thesis. International Organization 59 (2):473–94.CrossRefGoogle Scholar
Helpman, Elhanan, Itskhoki, Oleg, and Redding, Stephen. 2010. Inequality and Unemployment in a Global Economy. Econometrica 78 (4):1239–83.Google Scholar
Holden, Steinar, and Wulfsberg, Fredrik. 2007. Downward Nominal Wage Rigidity in the OECD. SSRN Scholarly Paper ID 667224. Social Science Research Network.CrossRefGoogle Scholar
Höpner, Martin, and Lutter, Mark. 2014. One Currency and Many Modes of Wage Formation: Why the Eurozone Is Too Heterogeneous for the Euro. SSRN Scholarly Paper, ID 2553185. Social Science Research Network.CrossRefGoogle Scholar
Iversen, Torben. 1999. Contested Economic Institutions: The Politics of Macroeconomics and Wage Bargaining in Advanced Democracies. Cambridge University Press.Google Scholar
Iversen, Torben, and Soskice, David. 2001. An Asset Theory of Social Policy Preferences. American Political Science Review 95 (4):875–93.CrossRefGoogle Scholar
Iversen, Torben, and Soskice, David. 2010. Real Exchange Rates and Competitiveness: The Political Economy of Skill Formation, Wage Compression, and Electoral Systems. American Political Science Review 104 (3):601–23.CrossRefGoogle Scholar
Iversen, Torben, and Stephens, John D.. 2008. Partisan Politics, the Welfare State, and Three Worlds of Human Capital Formation. Comparative Political Studies 41 (4–5):600–37.CrossRefGoogle Scholar
Jensen, Bradford J., Quinn, Dennis P., and Weymouth, Stephen. 2017. Winners and Losers in International Trade: The Effects on US Presidential Voting. International Organization 71 (3):423–57.CrossRefGoogle Scholar
Kalemli-Ozcan, Sebnem, Sorensen, Bent, Villegas-Sanchez, Carolina, Volosovych, Vadym, and Yesiltas, Sevcan. 2017. How to Construct Nationally Representative Firm Level Data from the ORBIS Global Database. Working Paper No. 21558, National Bureau of Economic Research, Cambridge, MA.Google Scholar
Katzenstein, Peter J. 1985. Small States in World Markets: Industrial Policy in Europe. Cornell University Press.Google Scholar
Kenworthy, Lane. 2001. Wage-Setting Measures: A Survey and Assessment. World Politics 54 (1):57–98.CrossRefGoogle Scholar
Kim, In Song. 2017. Political Cleavages Within Industry: Firm-level Lobbying for Trade Liberalization. American Political Science Review 111 (1):1–20.CrossRefGoogle Scholar
Kim, In Song, and Osgood, Iain. 2019. Firms in Trade and Trade Politics. Annual Review of Political Science 22 (1):399–417.CrossRefGoogle Scholar
Kono, Daniel Yuichi. 2009. Market Structure, Electoral Institutions, and Trade Policy. International Studies Quarterly 53 (4):885–906.CrossRefGoogle Scholar
Madeira, Mary Anne. 2016. New Trade, New Politics: Intra-industry Trade and Domestic Political Coalitions. Review of International Political Economy 23 (4):677–711.CrossRefGoogle Scholar
Manger, Mark S., and Sattler, Thomas. 2020. The Origins of Persistent Current Account Imbalances in the Post-Bretton Woods Era. Comparative Political Studies 53 (3–4):631–64.CrossRefGoogle Scholar
Mansfield, Edward, and Mutz, Diana. 2009. Support for Free Trade: Self-Interest, Sociotropic Politics, and Out-Group Anxiety. International Organization 63 (2):425–57.CrossRefGoogle Scholar
Margalit, Yotam. 2011. Costly Jobs: Trade-Related Layoffs, Government Compensation, and Voting in US Elections. American Political Science Review 105 (1):166–88.CrossRefGoogle Scholar
Margalit, Yotam. 2012. Lost in Globalization: International Economic Integration and the Sources of Popular Discontent. International Studies Quarterly 56 (3):484–500.CrossRefGoogle Scholar
Mayda, Anna Maria, and Rodrik, Dani. 2005. Why Are Some People (and Countries) More Protectionist than Others? European Economic Review 49 (6):1393–430.CrossRefGoogle Scholar
Melitz, Marc J. 2003. The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity. Econometrica 71 (6):1695–725.CrossRefGoogle Scholar
Melitz, Marc J., and Ottaviano, Gianmarco I. P.. 2008. Market Size, Trade, and Productivity. Review of Economic Studies 75 (1):295–316.CrossRefGoogle Scholar
Milner, Helen V., and Kubota, Keiko. 2005. Why the Move to Free Trade? Democracy and Trade Policy in the Developing Countries. International Organization 59 (1):107–43.CrossRefGoogle Scholar
Osgood, Iain. 2018. Globalizing the Supply Chain: Firm and Industrial Support for US Trade Agreements. International Organization 72 (2):455–84.CrossRefGoogle Scholar
Osgood, Iain, Tingley, Dustin, Bernauer, Thomas, Kim, In Song, Milner, Helen V., and Spilker, Gabriele. 2016. The Charmed Life of Superstar Exporters: Survey Evidence on Firms and Trade Policy. Journal of Politics 79 (1):133–52.CrossRefGoogle Scholar
Owen, Erica, and Johnston, Noel. 2017. Occupation and the Political Economy of Trade: Job Routineness, Offshorability, and Protectionist Sentiment. International Organization 71 (4):665–99.CrossRefGoogle Scholar
Paster, Thomas. 2017. How Do Business Interest Groups Respond to Political Challenges? A Study of the Politics of German Employers. New Political Economy 23 (6):674–89.CrossRefGoogle Scholar
Pavcnik, Nina. 2002. Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants. Review of Economic Studies 69 (1):245–76.CrossRefGoogle Scholar
Pontusson, Jonas, Rueda, David, and Way, Christopher R.. 2002. Comparative Political Economy of Wage Distribution: The Role of Partisanship and Labour Market Institutions. British Journal of Political Science 32 (2):281–308.CrossRefGoogle Scholar
Potrafke, Niklas. 2013. Globalization and Labor Market Institutions: International Empirical Evidence. Journal of Comparative Economics 41 (3):829–42.CrossRefGoogle Scholar
Rehm, Philipp. 2009. Risks and Redistribution: An Individual-Level Analysis. Comparative Political Studies 42 (7):855–81.CrossRefGoogle Scholar
Rehm, Philipp. 2011. Social Policy by Popular Demand. World Politics 63 (2):271–99.CrossRefGoogle Scholar
Rickard, Stephanie J. 2015. Compensating the Losers: An Examination of Congressional Votes on Trade Adjustment Assistance. International Interactions 41 (1):46–60.CrossRefGoogle Scholar
Ritchie, Melinda, and You, Hye Young. 2020. Trump and Trade: Protectionist Politics and Redistributive Policy. Journal of Politics <https://doi.org/10.1086/710322>.Google Scholar
Rodrik, Dani. 1998. Why Do More Open Economies Have Bigger Governments? Journal of Political Economy 106 (5):997–1032.CrossRefGoogle Scholar
Rogowski, Ronald. 1987. Trade and the Variety of Democratic Institutions. International Organization 41 (2):203–23.CrossRefGoogle Scholar
Rudra, Nita. 2005. Globalization and the Strengthening of Democracy in the Developing World. American Journal of Political Science 49 (4):704–30.CrossRefGoogle Scholar
Rueda, David, and Pontusson, Jonas. 2000. Wage Inequality and Varieties of Capitalism. World Politics 52(3):350–83.CrossRefGoogle Scholar
Ruggie, John J. 1982. International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order. International Organization 36 (2):195–231.CrossRefGoogle Scholar
Scheve, Kenneth, and Slaughter, Matthew. 2004. Economic Insecurity and the Globalization of Production. American Journal of Political Science 48 (4):662–74.CrossRefGoogle Scholar
Thelen, Kathleen. 2004. How Institutions Evolve: The Political Economy of Skills in Germany, Britain, the United States, and Japan. Cambridge University Press.CrossRefGoogle Scholar
Thelen, Kathleen. 2009. Institutional Change in Advanced Political Economies. British Journal of Industrial Relations 47 (3):471–98.CrossRefGoogle Scholar
Thelen, Kathleen. 2012. Varieties of Capitalism: Trajectories of Liberalization and the New Politics of Social Solidarity. Annual Review of Political Science 15 (1):137–59.CrossRefGoogle Scholar
Thewissen, Stefan, and Rueda, David. 2019. Automation and the Welfare State: Technological Change As a Determinant of Redistribution Preferences. Comparative Political Studies 52 (2):171–208.CrossRefGoogle Scholar
Topalova, Petia, and Khandelwal, Amit. 2011. Trade Liberalization and Firm Productivity: The Case of India. Review of Economics and Statistics 93 (3):995–1009.CrossRefGoogle Scholar
Visser, Jelle. 2016. ICTWSS [Institutional Characteristics of Trade Unions, Wage Setting, State Intervention, and Social Pacts] database, version 5.1. Amsterdam Institute for Advanced Labour Studies, University of Amsterdam. Available at <https://www.ictwss.org/>..>Google Scholar
Walter, Stefanie. 2010. Globalization and the Welfare State: Testing the Microfoundations of the Compensation Hypothesis. International Studies Quarterly 54 (2):403–26.CrossRefGoogle Scholar
Walter, Stefanie. 2017. Globalization and the Demand-Side of Politics: How Globalization Shapes Labor Market Risk Perceptions and Policy Preferences. Political Science Research and Methods 5 (1):55–80.CrossRefGoogle Scholar
Wren, Anne, and Rehm, Philipp. 2013. Service Expansion, International Exposure, and Political Preferences. In The Political Economy of the Service Transition, edited by Wren, Anne, 248–81. Oxford University Press.CrossRefGoogle Scholar
Supplementary material: PDF

Baccini et al. supplementary material

Baccini et al. supplementary material

Download Baccini et al. supplementary material(PDF)
PDF 4.7 MB
Supplementary material: Link

Baccini et al. Dataset

Dataset

https://doi.org/10.7910/DVN/SIEH2Y
Link