Trade and Labour Demand Elasticity in Imperfect Competition: Theory and Evidence

In recent years, a growing body of the literature in international trade tried to investigate whether openness has been increasing labour demand elasticities. From a labour theory perspective in partial equilibrium, the Allen-Hamermesh theoretical framework became one of the few general frameworks to refer to1. This theory states that labour demand elasticity should be positively affected by its two principal determinants: the elasticity of substitution between labour and other factors and the elasticity of demand for goods to prices. Under the assumption that openness is affecting these factors by increasing the possibility of substitution among factors and goods respectively, that relation could then predict a consecutive increase in the elasticity of demand for labour. Although some empirical studies in the field were inspired by that relation (i.e. Slaughter (2001), Haskel, Slaughter and Fabbri (2002) among others), two issues remain. First, Allen (1938) showed that this relation holds in a perfect competition environment at the industry level. While it is now widely recognized that imperfect competition is one of the most influent basis for a rise in trade and multinational activities, the Allen-Hamermesh relation constrains the researchers to test the impact of openness on labour demand elasticities assuming competitive markets. The first question addressed then by this article is how could the Allen-Hamermesh (AH) relation be extended to an imperfect competition world2. Following Dixit’s (1990) modelling framework, we show that AH can be generalized to allow for imperfect competition. In particular, under the assumption of oligopoly, the elasticity of labour de-