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


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.

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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.