Threat Effects and Trade: Wage Discipline through Product Market Competition

Arindrajit Dube 1  and Sanjay G. Reddy 2
  • 1 Department of Economics, Thompson Hall, University of Massachusetts, Amherst, MA 01002, USA
  • 2 Department of Economics, The New School for Social Research, 6 E. 16th Street, New York, NY 10003, USA
Arindrajit Dube and Sanjay G. Reddy

Abstract

We present a model of the effect of heightened product market competition induced by trade liberalization on the distribution of income between profits and wages. Integration increases the employment cost of wage demands, thereby decreasing bargained wages and the share of rents accruing to workers. This effect is amplified because of the existence of strategic complementarities which bring about a race to the bottom. Wage discipline induced by trade liberalization reduces the negative impact of increased competition on firm rents, and may even raise profits.

  • Abowd, J. M. and T. Lemieux (1991) “The Effects of International Competition on Collective Bargaining Outcomes: A Comparison of the United States and Canada.” In: (J. M. Abowd and R. Freeman, eds. ) Immigration, Trade, and the Labor Market. Chicago, IL: University of Chicago Press, 1991.

  • Abowd, J. M. and T. Lemieux (1993) “The Effects of Product Market Competition on Collective Bargaining Agreements: The Case of Foreign Competition in Canada,” Quarterly Journal of Economics, CVIII:983–1014.

  • Autor, D. H., D. Dorn and G. H. Hanson (Forthcoming) “The China Syndrome: Local Labor Market Effects of Import Competition in the United States,” American Economic Review.

  • Belzer, M. H. (1995) “Collective Bargaining After Deregulation: Do the Teamsters Still Count?” Industrial and Labor Relations Review, XLVIII:636–655.

  • Belzer, M. H. (1998) Paying the Toll: Economic Deregulation of the Trucking Industry. Washington DC: Economic Policy Institute.

  • Bhagwati, J. (1998) Play it Again Sam: A New Look at Trade and Wages. Columbia University, mimeo, 1998.

  • Bhagwati, J. and M. Kosters (1994) Trade and Wages: Leveling Wages Down? Washington, DC: The American Enterprise Institute.

  • Blanchower, D. G. and S. Machin (1996) “Product Market Competition, Wages and Productivity: International Evidence from Establishment-Level Data,” Annales d’Economie et de Statistique, XLI-XLII:219–253.

  • Blanchard, O., and F. Giavazzi (2003) “Macroeconomic Effects of Regulation and Deregulation in Goods and Labor Markets,” Quarterly Journal of Economics, CXVIII:879–907.

  • Blanchflower, D. G., A. J. Oswald and P. Sanfey (1996) “Wages, Profits and Rent-Sharing,” Quarterly Journal of Economics, CXI:227–251.

  • Bombardini, M. (2008) “Firm Heterogeneity and Lobby Participation,” Journal of International Economics, LXXV:329–348.

  • Brander, J. A. and P. Krugman (1983) “A ’Reciprocal Dumping’ Model of International Trade Policy,” Journal of International Economics, XV:313–321.

  • Card, D. (1986) “The Impact of Deregulation on the Employment and Wages of Airline Mechanics,” Industrial and Labor Relations Review XXXIX:527–538.

  • Card, D. (1989) Deregulation and Labor Earnings in the Airline Industry. Industrial Relations Section Working Paper No. 247, Princeton University, 1989.

  • Christofides, L. and A. Oswald (1992) “Real Wage Determination and Rent-Sharing in Collective Wage Agreements,” Quarterly Journal of Economics, CVII:985–1002.

  • Currie, J. and A. Harrison (1997) “Sharing the Costs: the Impact of Trade Reform on Capital and Labor in Morocco,” Journal of Labor Economics, XV:S44–S72.

  • Davis, D. and J. Harrigan (2011) “Good Jobs, Bad Jobs, and Trade Liberalization,” Journal of International Economics, 84:26–36.

  • Driffill, J. and F. van der Ploeg (1995) “Trade Liberalisation with Imperfect Competition in Goods and Labour Markets,” Scandinavian Journal of Economics, XCVII:223–243.

  • Dunlop, J. (1950) Wage Determination Under Trade Unions. New York, NY, USA: A.M.Kelly.

  • Ehrenberg, R. G. and R. S. Smith (1997) Modern Labor Economics. New York, NY, USA: Addison-Wesley, 1997.

  • Feliciano, Z. (2001) “Workers and Trade Liberalization: The Impact of Trade Reforms in Mexico on Wages and Employment,” Industrial and Labor Relations Review, LV:95–115.

  • Freeman, R. (1997) Spurts in Union Growth: Defining Moments in Social Processes. NBER Working Paper No. 6012.

  • Freeman, R. and L. Katz (1991) “Industrial Wage and Employment Determination in an Open Economy.” In: (J.M. Abowd and R. Freeman, eds.) Immigration, Trade, and the Labor Market. Chicago, IL: University of Chicago Press.

  • Galiani, S. and P. Sanguinetti (2003) “The Impact of Trade Liberalization on Wage Inequality: Evidence from Argentina,” Journal of Development Economics, LXXII:497–513.

  • Hall, R. E. and D. M. Lilien (1979) “Efficient Wage Bargains Under Uncertain Supply and Demand,” American Economic Review, LXIX:868–879.

  • Hamermesh, D. (1932) Labor Demand. Princeton: Princeton University Press.

  • Hanson, G.H. and A. Harrison (1995) Trade, Technology and Wage Inequality. NBER Working Paper No. 5110.

  • Hanson, G.H. and A. Harrison (1999) “Trade Liberalization and Wage Inequality in Mexico,” Industrial and Labor Relations Review, LII:271–288.

  • Harrison, A. (2002) Has Globalization Reduced Labor’s Share? Some Cross-Country Evidence. University of California at Berkeley, mimeo

  • Helpman, E. and P. Krugman (1989) Trade Policy and Market Structure. Cambridge: MIT Press.

  • Helpman, E., O. Itskokhi and S. Redding (2010) “Inequality and Unemployment in a Global Economy,” Econometrica, 78(4):1239–1283.

  • Hicks, J. R. (1932) The Theory of Wages. London: Macmillan.

  • Hicks, J. R. (1968) The Theory of Wages. New York, NY: London: Macmillan.

  • Huizinga, H. (1993) “International Market Integration and Union Wage Bargaining,” Scandinavian Journal of Economics, XCV:249–255.

  • Johnson, N. B. (1991) “Airline Workers’ Earnings and Union Expenditures Under Deregulation,” Industrial and Labor Relations Review, XLV:154–165.

  • Krugman, P. and R. Z. Lawrence (1993) Trade, Jobs and Wages. NBER Working Paper No. 4478, 1993.

  • Lawrence, C. and R. L. Lawrence (1985) “Relative Wages in U.S. Manufacturing: an Endgame Interpretation,” Brookings Papers on Economic Activity (1):47–116.

  • Layard, R., S. Nickell and R. Jackman (1991) Unemployment: Macroeconomic Performance and the Labour Market. Oxford: Oxford University Press.

  • Levinsohn, J. (1993) “Testing the Imports-as-Market-Discipline Hypothesis,” Journal of International Economics, XXXV:1–22.

  • Lundberg, S. and R. Pollak (1993) “Separate Spheres Bargaining and the Marriage Market,” Journal of Political Economy, CI:988–1010.

  • Marshall, A. (1949) Principles of Economics. New York, NY, USA: McMillan.

  • Macurdy, T. E. and J. Pencavel (1986) “Testing Between Competing Models of Wage and Employment Determination in Unionized Markets,” Journal of Political Economy, XCIV:S3–S39.

  • McDonald, I. M. and R. M. Solow (1981) “Wage Bargaining and Employment,” American Economic Review, LXXI:896–908.

  • Melitz, M. J. (2003) “The Impact of Trade on Intra‐industry Reallocations and Aggregate Industry Productivity,” Econometrica, 71(6):1695–1725.

  • Melitz, M. J., and G. I. Ottaviano (2008) “Market size, Trade, and Productivity,” The Review of Economic Studies, 75(1):295–316.

  • Mezzetti, C. and E. Dinopoulos (1991) “Domestic Unionization and Import Competition,” Journal of International Economics, XXXI:79–100.

  • Mitra, D. (1999) “Endogenous Lobby Formation and Endogenous Protection: A Long Run Model of Trade Policy Determination,” American Economic Review LXXXIX:1116–1134.

  • Munch, J. B. and J. R. Skaksen (2002) “Product Market Integration and Wages in Unionized Countries,” Scandinavian Journal of Economics, CIV:289–299.

  • Naylor, R. (1998) “International Trade and Economic Integration When Labor Markets are Generally Unionised,” European Economic Review XLII:1251–1267.

  • Nickell, S. J., Vainiomaki and S. Wadhwani (1994) “Wages and Product Market Power,” Economica LXI:457–473.

  • Oswald, A. (1982) “The Microeconomic Theory of the Trade Union,” The Economic Journal, XCII:576–595.

  • Rama, M. and G. Tabellini (1998) “Lobbying by Capital and Labor Over Trade and Labor Market Policies,” European Economic Review, XLII:1295–1316.

  • Reddy, S. (2000) Bargaining and Distribution: Essays on International Integration and National Regulation. unpublished Ph.D. dissertation, Dept. of Economics, Harvard University.

  • Revenga, A. L. (1997) “Employment and Wage Effects of Trade Liberalization: The Case of Mexican Manufacturing,” Journal of Labor Economics, XV:S20–S43.

  • Richardson, J. D. and E. Khripounova (1996) Estimating the “Market-Power” Component of International Trade’s Impact on U.S. Labor. Syracuse University, unpublished working paper.

  • Rodriguez, F. and D. Ortega (2006) Trade Policy and Factor Prices: An Empirical Strategy. Wesleyan Economics Working Paper No. 2005-004. Available at: http://repec.wesleyan.edu/pdf/frrodriguez/2005004_rodriguez.pdf.

  • Rodrik, D. (1997) Has Globalization Gone too Far? Washington, DC: Institute for International Economics.

  • Rose, N. L. (1987) “Labor Rent-Sharing and Regulation: Evidence from the Trucking Industry,” Journal of Political Economy, XCV:1146–1178.

  • Skillman, G. (2000) The Impact of Liberalization on Wage Levels: Considerations Raised by Strategic Bargaining Analysis. Wesleyan University. Available at: http://gskillman.web.wesleyan.edu/research/barg.pdf.

  • Slaughter, M. (1998) “International Trade and Labor-Market Outcomes: Results, Questions and Policy Options,” The Economic Journal, CVIII:1452–1462.

  • Slaughter, M. (2000) “What are the Results of Product-Price Studies and What Can We Learn From Their Differences?” In: (R. C. Feenstra, ed.) The Impact of International Trade on Wages. NBER Conference Volume, pp. 284–291.

  • Slaughter, M. (2001) “International Trade and Labor-Demand Elasticities” Journal of International Economics, LIV:27–56.

  • Slichter, S. (1950) “Notes on the Structure of Wages.” Review of Economics and Statistics, XXXII:80–91.

  • Spector, D. (2004) “Competition and the Capital-labor Conflict,” European Economic Review, XLVIII:25–38.

  • Svejnar, J. (1986) “Bargaining Power, Fear of Disagreement, and Wage Settlements: Theory and Evidence from US Industry,” Econometrica, LVI:1055–1074.

Purchase article
Get instant unlimited access to the article.
$42.00
Log in
Already have access? Please log in.


or
Log in with your institution

Journal + Issues

The Journal of Globalization and Development (JGD) publishes academic research and policy analysis on globalization, development and the complex interactions between them. It is dedicated to stimulating a dialogue between theoretical advances and rigorous empirical studies to push forward the frontiers of development analysis and seeks to combine academic insights with the in-depth knowledge of practitioners to address important policy issues.

Search