Heterogeneous firms and wages

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Mary Amiti & Donald R. Davis – “Trade, Firms, and Wages: Theory and Evidence” NBER WP 14106

We develop a general equilibrium model which features firm heterogeneity, trade in final and intermediate products, and firm-specific wages. In doing so, it builds on the work on heterogeneous firms of Marc J. Melitz (2003) as amended to allow trade in intermediate goods by Hiroyuki Kasahara and Beverly J. Lapham (2007). Both of these models maintain the assumption of homogeneous labor and a perfect labor market, so that the wages paid by a firm are disconnected from that firm’s performance. We continue to focus on homogeneous labor, but introduce a novel variant of fair wages which links the wages at a firm to the profitability of the firm…

A decline in output tariffs reduces the wages of workers at firms that sell only in the domestic market, but raises the wages of workers at firms that export. A decline in input tariffs raises the wages of workers at firms using imported inputs, but reduces wages at firms that do not import inputs…

We test our model’s hypotheses with a rich data set covering the Indonesian trade liberalization of 1991-2000. The trade liberalization provides us with over 500 price changes per period, covering both input and output tariffs. A distinctive feature of the Indonesian data set is the availability of firm level data on individual inputs, making it possible to construct highly disaggregated input tariffs. This, in turn, enables us to disentangle the effects of output and input tariffs…

A 10 percentage point fall in output tariffs decreases wages by 3 percent in firms oriented exclusively toward the domestic economy. But the same fall in the output tariff increases wages by up to 3 percent in firms that export. A 10 percentage point fall in input tariffs has an insignificant effect on firms that don’t import, but increases wages by up to 12 percent in firms that do import. In short, liberalization along each dimension raises wages for workers at firms which are most globalized and lowers wages at firms oriented to the domestic economy or which are marginal globalizers. Ours is the first paper to show an empirical link between input tariffs and wages, and the first to show differential effects from reducing output tariffs on exporters and non-exporters.

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