How wages and employment adjust to trade liberalization: Quasi-experimental evidence from Austria ☆

a r t i c l e i n f o We study the response of regional employment and nominal wages to trade liberalization, exploiting the natural experiment provided by the opening of Central and Eastern European markets after the fall of the Iron Curtain in 1990. Using data for Austrian municipalities, we examine differential pre-and post-1990 wage and employment growth rates between regions bordering the formerly communist economies and interior regions. If the 'border regions' are defined narrowly, within a band of less than 50 km, we can identify statistically significant liberalization effects on both employment and wages. While wages responded earlier than employment, the employment effect over the entire adjustment period is estimated to be around three times as large as the wage effect. The implied slope of the regional labor supply curve can be replicated in an economic geography model that features obstacles to labor migration due to immobile housing and to heterogeneous locational preferences. We address a fundamental but to date surprisingly underresearched question: how do changes in market access affect factor prices and factor quantities? To put it simply: if a certain region offers advantageous access to markets elsewhere, will this advantage translate into a large number of producers locating in that region, will it translate into higher factor rewards for producers located there, or will we observe some of both effects? As a natural corollary to this question, we also study such effects across different time horizons, as quantity and price adjustments may well materialize at different speeds. We focus on the case where changes in market access are due to the liberalization of international trade. Why should we care about the difference between factor price effects and factor quantity effects of changes in market access? First, this distinction helps us understand adjustment mechanisms of regional economies, by allowing us to trace regional factor supply schedules. For example, large price effects suggest the existence of important barriers to the reallocation of labor and capital across space and/or across sectors. Information on the relative magnitude of price and quantity effects can thereby help us gauge the realism of alternative theoretical models. Second, the policy implications of market-access effects vary considerably depending on whether these effects work through factor prices or through factor quantities. Price effects bring about spatial inequality of (pre-tax) factor rewards, which can potentially be evened out via redistributive policy. Quantity effects may …