Susan Chun Zhu, Michigan State University 1 Labor Market Adjustment to Globalization with Heterogeneous Agents: Data and Empirical Specifications Carl Davidson 1,2, Steven Matusz 1,2 and Susan Chun Zhu 1 1 Michigan State University 2 GEP, University of Nottingham

Susan Chun Zhu, Michigan State University 2 Outline  Effects of trade openness on the firm-level wages  Effects of trade openness on assortative matching  Effects of trade openness on the distribution of jobs

Susan Chun Zhu, Michigan State University 3 Effects of Trade Openness on Firm-level Wages  In exported oriented industries, High-skill workers at both high-tech and low-tech firms gain. High-skill workers at high-tech firms gain more than at low-tech firms. Low-skill workers could gain or lose. Wage dispersion within the firm increases.  In import-competing industries, the effects of trade openness on the firm-level wages are opposite to those for exported- oriented industries.

Susan Chun Zhu, Michigan State University 4 Wage Regressions  j - firms, i - industries   logw j is the change in the average log wage of high-skill or low-skill workers, or the change in the wage dispersion in firm j   Trade i is the industry-level measure of trade openness  Tech j is the technology level of firm j   Z j includes controls for the change in firm characteristics e.g., capital- labor ratio, capital stock, shipments,…   j is the error term

Susan Chun Zhu, Michigan State University 5 Hypotheses about the Wage Effects  The wage effect of trade openness   1  3 Tech j  In exported oriented industries, high-skill workers gain more at high-tech firms than at low-tech firms.    3  High-skill workers Low-skill workers Wage dispersion Export-oriented  Import-competing 

Susan Chun Zhu, Michigan State University 6 Measurements of Wages  Observed annual compensation to workers  Human capital measure We want to distinguish the wage changes due to sorting of workers with different skills into firms from the changes due to changing wage premia at the firm level.

Susan Chun Zhu, Michigan State University 7 Human Capital Measure  logw ht is the log wage of woker h working for firm j at date t  j(h,t) indicates the firm j of worker h at date t  x ht is a vector of observable time-varying characteristics of worker h (e.g., age squared, experience squared, tenure and tenure squared)   h is the worker fixed effects   j(h,t)t is the firm-year fixed effects  The human capital measure of worker h  x ht  +  h.

Susan Chun Zhu, Michigan State University 8 Measurements of Trade Openness  Ad valorem tariffs and freight rates  Outsourcing  Inward and outward foreign direct investment  Real exchange rates  Import penetration (imports  domestic absorption) and export penetration (exports / domestic production)

Susan Chun Zhu, Michigan State University 9 Measurements of Firm-level Technology  Computer investment  R&D  sales  Number of technology used  Share of new capital investment

Susan Chun Zhu, Michigan State University 10 Additional Controls  Capital-labor ratio  Firm size Capital stock Shipments  Region dummies

Susan Chun Zhu, Michigan State University 11 Effects of Trade Openness on Assortative Matching  With trade openness, the degree of assortative matching increases in the export-oriented industries, but decreases in the import-competing industries.

Susan Chun Zhu, Michigan State University 12 Measuring Assortative Matching  Assortative matching means that high-  workers match with high-  firms, which implies that the correlation between  h and  j(h,t)t should positive.

Susan Chun Zhu, Michigan State University 13 Measuring the Change in Assortative Matching (1)  Calculate the correlation between  h and  j(h,t)t for each industry and each year.  Hypothesis: With trade openness, the correlation increases for export-oriented industries, but decreases for import-competing industries.

Susan Chun Zhu, Michigan State University 14 Measuring the Change in Assortative Matching (2)  Hypotheses: In export-oriented industries, high-  workers are more likely to move from low-  to high-  firms than from high-  to low-  firms. In import-competing industries, the direction of worker flows is the opposite to that for export-oriented industries.  jt Low-tech firms with low-skill workers Low-tech firms with high-skill workers High-tech firms with high-skill workers

Susan Chun Zhu, Michigan State University 15 Measuring the Change in Assortative Matching (3)  Hypotheses: In export-oriented industries, trade openness reduces the mean of  h for low- and middle-  firms, but raises it for high-  firms. In export-oriented industries, trade openness reduces standard deviations of  h. for all types of firms. In import-competing industries, trade openness raises the mean and standard deviations of  h. for middle-  firms.  jt Low-tech firms with low-skill workers Low-tech firms with high-skill workers High-tech firms with high-skill workers

Susan Chun Zhu, Michigan State University 16 Effects of Trade Openness on the Distribution of Jobs  With trade openness, middling jobs (low-tech firms matched with high-skill workers) disappear in export-oriented industries, but appear in import-competing industries.

Susan Chun Zhu, Michigan State University 17 Polarization in the U.S. Labor Market Source: Autor, Katz and Kearney (RESTAT, 2008)

Susan Chun Zhu, Michigan State University 18 Polarization in the U.K. Labor Market Source: Goos and Manning (RESTAT, 2007)

Susan Chun Zhu, Michigan State University 19 The Changes in the Distribution of Jobs for Export-Oriented Industries  Hypotheses: In export-oriented industries, employment reduces in middle-  firms, but increases in both low- and high-  firms. In export-oriented industries, employment of low-skill workers increases in low-  firms, and employment of high-skill workers increases in high-  firms.  employment  jt  Low-tech firms with high-skill workers High-tech firms with high-skill workers Low-tech firms with low-skill workers

Susan Chun Zhu, Michigan State University 20 The Changes in the Distribution of Jobs for Import-competing Industries  Hypotheses: In import-competing industries, employment increases in middle-  firms, but reduces in both low- and high-  firms. In import-competing industries, employment of high-skill workers increases in middle-  firms.  employment  jt  Low-tech firms with high-skill workers High-tech firms with high-skill workers Low-tech firms with low-skill workers