Wage Effects of Trade Reform with Endogenous Worker Mobility

a r t i c l e i n f o 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. Central to academic and policy discussions about the process of globalization is the question of how greater trade openness impacts the labor market and the distribution of incomes in society. More narrowly, the theoretical literature in trade has recently focused on the question of whether the wage effects of trade depend upon the mode of globalization of the firm at which the worker is employed; that is, whether workers employed at exporting firms earn higher wages and experience different wage changes following trade liberalization than workers employed at non-exporting firms. This theoretical literature offers a wide range of predictions concerning the distributional impact of trade liberalization. In neoclassical settings with competitive goods and factor markets, identical workers must earn identical wages; trade does not differentially impact the wages of workers based on the nature of the firm at which the worker is employed. However, product markets and the labor market may both be imperfectly competitive. For instance, monopolistically competitive firms of heterogeneous productivity, as in Melitz (2003), may engage in rent-sharing with homogeneous and randomly-allocated workers, as in Egger and Kreickemeier (2009) and Amiti and Davis (2012). In this case, the wages of workers employed in the more productive, exporting firms, which experience a relative improvement in profits or market …