Trade Liberalization and Labor Market Institutions

by

Leonardo Baccini (McGill University),
Mattia Guidi (Scuola Normale Superiore),
Arlo Poletti (University of Trento) and
Aydin Yildirim (European University Institute).

Abstract:

While the distributional consequences of market liberalization at the firm level are well understood, the previous literature has paid limited attention to how variations in domestic institutions across countries affect winners and losers from opening up to trade. We argue that the presence of institutions of coordinated wage bargaining, which pose a ceiling to wage increases, helps smaller firms weather the rising competition triggered by trade liberalization. We test this hypothesis using a firm-level dataset on European Union countries, which includes more than 800,000 manufacturing firms between 2003 and 2015. We find that, for productive firms, gains from trade are twice as large in countries with liberal wage bargaining (e.g. the United Kingdom) as they are in countries with coordinated wage bargaining (e.g. Germany). Moreover, we show that trade liberalization triggers a differential demand for redistribution at the individual level across different labour markets.