Trade Liberalization, Firm Heterogeneity, and Unemployment: An Empirical Investigation

This paper provides empirical evidence for the interaction between firm-level total factor productivity and trade liberalization as key determinants of firm-level job destruction caused by trade. We also test some key theoretical predictions from Melitz (2003), whose model is used to derive an explicit equation relating firm productivity and trade-induced labor layoff when a country liberalizes its trade policy. Employing US firm-level data, we find empirical support and quantify the following: a) Total factor firm productivity is inversely related to firm-level trade-induced layoffs; b) Trade liberalization increases the number of jobs lost due to trade; c) Trade liberalization results in an increase in the minimum level of productivity required for domestic production; d) Trade liberalization lowers the minimum productivity threshold required for exporting; e) The increase, due to trade liberalization, in the minimum productivity threshold for domestic production is smaller than the absolute decrease in the export productivity threshold. JEL Classification Codes: F10, F12, F14, and F16