Trade Exposure, Export Intensity, and Wage Volatility: Theory and Evidence

Abstract

This paper addresses the link between trade exposure and wage volatility. First, it shows, in a simple model, that trade exposure magnifies the impact of domestic productivity shocks on industry-specific labor demand, particularly for the less export-intensive industries, and that, if labor is not perfectly mobile, this implies a rise in wage volatility. Then, it tests these predictions, using industry data. The empirical results confirm that wage volatility increases with an industry's degree of openness, and that it declines with an increase in the industry's export intensity. © 2005 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Labor Markets and Kaleidoscopic Comparative Advantage

“…Hence, it can explain the positive industry-level relationship between displacement rates and the levels of import and export penetration found in Addison et al (1995Addison et al ( , 2000. Our findings are also suggestive of the industry-level association between openness and the volatility of (i) employment and (ii) wages, found in Gourinchas (1999) and Traca (2002), respectively.…”

“…It would also arise if the shocks are firm-specific, provided the firm is large and/or has market power. However, as shown in Traca (2002), if the shock affects an industry worldwide, its countercyclical effect on the world price of a tradable industry is similar to the case of a nontradable industry. Moreover, if the shock affects all industries in the country, the countercyclical effect on the price of a tradable will emerge, similarly to a nontradable, through the adjustment of the real exchange rate.…”

Offshoring, Economic Insecurity, and the Demand for Social Insurance

“…This "risk" is essentially the higher volatility in wages and employment from a more elastic demand for labor. Traca (2005) …nds evidence to support this hypothesis. Slaughter (2001), however, …nds "mixed [empirical] support" for the hypothesis that trade has contributed to increased labor demand elasticities.…”

“…This apparent rise in insecurity has focused attention on future economic globalization. Rodrik (1997), Scheve and Slaughter (2004), and Traca (2005), among others, …nd that higher levels of economic insecurity result from greater wage and employment volatility, which is a product of trade-induced increases in labor-demand elasticities. Moreover, Rodrik (1998) claims there is a positive relationship between increased economic integration and the size of the welfare state.…”

Globalization, Wage Volatility, and the Welfare of Workers*

“…This asymmetry extends to the case where the domestic industry influences world prices. In that case, the effect of the domestic shock on the world relative price is negative, but of a smaller magnitude than for nontradables (see Traca, 2002, for a discussion). 5.…”