Language barriers to foreign trade: evidence from translation costs∗

[Foreign trade involves tasks that may be subject to language barriers, such as researching foreign markets, communicating with counterparties and marketing products to foreign consumers. Language skills have a wage premium that is determined by local and worldwide supply and demand for language services, and the premium is specific to each country and pair of languages. I construct a novel measure of language skill premia based on professional rates for translation services from an online market. The skill premium measure relies on the bi-directional nature of the translation cost data to control both for difficulties inherent in defining a unit of account (as the per word “piece-rates” common in the translation industry do not embody equal amounts of work across languages) and the skilled-wage component of rates. I develop an estimation strategy based on overlaps in ethnolinguisitic populations to estimate the effect of the language skill premium as a cost barrier to trade, net of confounders such as trade by shared ethnic populations. I find that accounting for country and languagespecific language barriers yields a three-fold increase in the estimated effect of language on foreign trade, relative to current estimates based on a shared common language.]