Labor-share dynamics -The role of import competition

Published: 15 October 2021
Author: Charlotte Paulie, And

Does increasing product-market competition from foreign firms affect domestic labor shares? By combining detailed Swedish firm-level data with an instrumental variable design, I show that an increase in import penetration caused by increased global competition results in a decrease in domestic industry-level labor shares. The decrease comes both from a reallocation of firms’ market shares and a fall in labor shares at the firm level. The analysis shows that the negative effect of competition on firm-level labor shares is driven by an increase in productivity that is not met by a corresponding increase in compensation to labor. I use these findings to calibrate a heterogeneous-firm model where domestic and foreign firms compete on the domestic product market. The calibrated model predicts that an increase in foreign competition corresponding to a one standard deviation increase in import penetration results in a 1.12 percentage point increase in welfare.

Keywords: Labor Share, Competition, International Trade, Welfare.
JEL codes: E25, L11, F10.

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IFAU Working paper 2021:13 “Labor-Share Dynamics: The Role of Import Competition” is written by Charlotte Paulie at the Department of economics at Uppsala university. For further information about this working paper, please contact Charlotte Paulie by phone: +46 735083249 or e-mail: charlotte.paulie@nek.uu.se

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