Labor Market Power and the Distorting Effects of International Trade

This article examines how trade shocks shape labor market imperfections that create market power in labor markets and prevent an efficient allocation of labor. I develop a framework for measuring such labor market distortions in monetary terms and document large degrees of those distortions in Germany’s manufacturing sector. Import competition can only exert labor market disciplining effects when firms rather than workers have labor market power. Otherwise, export demand and import competition shocks tend to fortify existing distortions by amplifying labor market power structures. This diminishes the gains from trade compared to a model with perfectly competitive labor markets.

Author: Matthias, Mertens
Volume: 2018.05
Publisher: Edward Elgar Publishing
Year: 2018
No. of pages: 65
Working papers