Trade Liberalization and Labor Market Institutions

Abstract While the firm-level distributional consequences of market liberalization are well understood, previous studies have paid only limited attention to how variations in domestic institutions across countries affect winners and losers from opening up trade. We argue that presence coordinated wage-bargaining institutions, which impose a ceiling on wage increases, state-subsidized vocational training, creates large supply highly skilled workers, generate labor frictions. Upward rigidity, particular, helps smaller firms weather rising competition increasing costs triggered by trade liberalization. test this hypothesis using data set European Union countries, includes more than 800,000 manufacturing between 2003 2014. find that, for productive firms, gains 20 percent larger with liberal economies they economies. Symmetrically, less experience significantly revenue losses compared show both an institutionalized availability subsidized training key mechanisms reducing reallocation unproductive In line our theory, we wages employment liberalized industries increase differentially types markets. Finally, provide suggestive evidence triggers differential demand redistribution at individual level different markets, is analysis.