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

Large Literature on Firm and Plant Level Adjustment to Globalization  Based on Bernard and Jensen 1999; Roberts and Tybout 1997  Only a fraction of firms export and those that do export only a faction of output  Exporting firms are bigger, more capital intensive, pay higher wages  There is “imperfect persistence” in the decision to export

Openness and Productivity  Openness enhances productivity in export markets -- could be due to “learning by exporting” or market share reallocations in favor of more productive firm  Openness leads to exit of weakest firms in export markets  Within-firm productivity gains in import- competing markets

Our Goal  To take a similarly disaggregated look at labor market adjustment to globalization  We emphasize: Firms are different by choice (adopt different technologies, employ different skill mixes of workers, pay different wages)  Need heterogeneity on both sides of labor market

Our Goal  With imperfect labor markets, qualities of the firm-worker matches may depend on a variety of factors, including trade position  Focus is on how globalization affects the performance of the labor market and the distribution of wages

Some Reasons to Add Worker Heterogeneity to New Trade Models  Firms that adopt different technologies hire workers (in terms of skill), pay different wages  Impact of liberalization on dislocated workers varies greatly  Underemployment a serious concern (especially lately with outsourcing of high-skill jobs)

Framework  High and low skill workers search for jobs  Ex ante identical firms choose what type of technology to adopt  In equilibrium, firms are different  Low-tech firms pay low wages (can use both types of workers)  High-tech firms use high-skill workers and pay high wages

Key Feature of the Model  If revenues generated by the two types of firms are not too different, high-skill workers accept low-tech jobs if they find them first (there is underemployment)  Yields suitable framework to analyze how well the labor market sorts workers across firm

The Model  Labor market based on Mortensen and Pissarides (REStud 1994)  Heterogeneity based on Yeaple (JIE 2005) and Albrecht and Vroman (IER 2002)  Trade extension based on Davidson, Matusz and Shevchenko (JIE 2007)

The Model  Product market is perfectly comp.  Labor market frictions  Firms create vacancies until exp. profit from doing so = 0  Total measure of workers = 1  q = fraction with low-skills  s i = skill level of worker i  Firms rent capital after filling vacancy

The Model -- Technology  Low-tech production process:

The Model -- Technology  High-tech production process (note that HS workers better suited for HT production process):

The Model – Matching  Matching Function: m(u,v)  CTRS: m(  ) with  = v/u  The arrival rate of vacancies for workers is m(  )  The arrival rate of workers for firms is z(  )=m(  )/   We assume m’(  ) >0; z’(  )<0

The Model -- Matching   = fraction of vacancies that are low-tech   = fraction of unemployed with low-skill  Low-skill workers find jobs at rate  m(  )  High-skill workers find jobs at rate m(  )  Low-tech firms fill vacancies at rate z(  )  High-tech firms fill vacancies at rate (1-  )z(  )

Additional Assumptions  Wages determined by GNBS (wages increasing in the size of the surplus and the worker’s outside option)  High-skill workers accept low-tech jobs if surplus to be split is positive (takes into account outside options and search costs)  Firms export if doing so increases the surplus to be split with the worker  There is a fixed cost to exporting

The Export Decision (Firm Adj.)  Initially, all firms sell output at p in the closed economy  Now, allow firms to export and get the world price p * > p  There is a fixed cost of exporting  The high-tech firms (the largest, most productive, most capital intensive firms) face the strongest incentive to export since they gain the most from exporting

The Export Decision (Firm Adj.)  Get entry by HT firms and as they leave to serve foreign market also get entry by LT firms to serve domestic market  Relatively more entry by HT firms (  falls)  In export markets industry-level productivity rises as market shares are reallocated towards high-tech firms  But, there are no within-firm productivity changes

The Export Decision (Firm Adj.)  Can get imperfect persistence for low-tech firms  Low-tech firms might change their export decision when the skill mix of its employee base changes if replacing a low-skill worker with a high-skill workers allows them to cover the fixed cost of exporting

Results on Labor Market Adjustments  Wage effects High-skill workers at high-tech firms gain (surplus higher, bargaining position improves since  falls ) High-skill workers at low-tech firms gain (outside opportunities better) Low-tech workers could gain or lose (higher surplus but bargaining position erodes)

Wage Effects -- Predictions  Falling trade costs should increase wages of the most highly skilled workers the most and may decrease the wages of the least skilled workers  Increase in inequality within the firm  This contrasts with Yeaple’s prediction (which assumes perfect competition in the labor market) in which middle level workers are harmed the most

Wage Effects -- Evidence  Exporting increases the wage gap (BJ 1997, Harrison and Hanson 1999)  As markets have become more open, wage gap has increased (Baldwin and Cain 2000)

Predictions on Labor Market Adjustment  In terms of match quality, now get less underemployment of high-skill workers  Labor market functions more efficiently (a new gain from trade)  Can get complete labor market separation if revenues spread sufficiently so that low-tech firms cannot afford to pay high-skill workers enough

Predictions on Productivity  With separation, get within firm productivity losses in weakest firms in export markets  Industry wide productivity still rises due to market share reallocations

Import Competition  If the model applies to an import-competing industry, openness lowers the price received by all firms  This reduces the gap between the revenues earned the two types of firms  If high-skill workers will not accept low-tech jobs in the closed economy, they may be willing to do so in an open economy

Import Competition  Can go from perfect labor market separation to equilibrium with underemployment  Labor market is less efficient due to trade (a new loss from trade)  Note that low-tech firms become more productive (can attract better workers) so there are within firm productivity gains for the weakest firms in the industry

Results – Assortative Matching  Big issue in literatures on marriage markets and imperfect labor markets – should the “good” types match with other “good” types and does this actually occur (Becker 1972)?  Here, good workers are better suited for high- tech employment so we want positive assortative matching

Results – Assortative Matching  Our model predicts that openness to trade affects what is likely to occur  Increased openness makes positive assortative matching more likely in export-oriented markets but less likely in import-competing markets  Openness affects the degree of assortative matching

Match Quality -- Predictions  Model yields several testable hypotheses about labor market adjustment to globalization  One particular prediction worth highlighting: Openness may alter the types of job matches that we observe  Openness may cause separation in exporting industries, mixing in import-competing industries

Conclusion  Acemoglu’s 1999 AER model has similar features (heterogeneous workers, initially identical firms, labor market frictions)  Two types of equilibria (separating and pooling)  Acemoglu presents evidence that middling jobs have been disappearing and have been replaced by the types of jobs that would be offered in a separating equilibrium

Conclusion  Our logic suggests that openness could cause this in exporting industries, and have the opposite effect in import-competing industries  Acemoglu does not break his industries up into groups based on trade position nor does he control for openness – we should try this

Conclusion  Abowd and Kramarz (2004) test for positive assortative matching in France and the US using linked employer-employee data  They find little or no evidence in favor of the theory that “good” workers match with “good” firms

Conclusion  Our theory implies that the trade position of an industry matters: positive assortative matching is more likely in export-oriented markets  Abowd and Kramarz do not control for the effects of international competition; we hope to do so

Conclusion  Note also: Abowd and Kramarz are looking for the type of matching (good firms with good workers versus good firms with weak workers)  With imperfect labor markets, get some mismatch  We argue that trade affects the extent of mismatching – trade alters the degree of assortative matching