Notes from

Pham, Hoang. 2023. “Trade Reform, Oligopsony, and Labor Market Distortion: Theory and Evidence.” Journal of International Economics: 103787.

Main arguments Link to heading

  • China’s access to WTO has led to a net reduction in labor market distortion.
  • Trade policy can affect the degree of competition in the labor market by changing
    • The number of firms in the market
      • a reduction in input tariffs can lead to an increase in the number of firms in the market
    • The degree of product differentiation
      • A reduction in output tariffs can lead to an increase in product differentiation

Key contributions Link to heading

The paper develops a theoretical framework that incorporates oligopsony competition in the labor market into a trade model with heterogeneous firms. This framework allows for the analysis of how trade policy affects firms’ competitive behavior in the labor market and the resulting labor market distortion.

The paper propose two complementary approaches to measure labor market distortion at the firm level empirically.

Using the resulting measures of labor market distortion, The paper establish a causal link between China’s trade policy reform (reductions in both output and input tariffs) and the consequential changes in labor market distortion.

Model Link to heading

  • The paper incorporates oligopsony into its model of labor market distortion by embedding an oligopsony competition structure in the labor market
  • It takes into account the strategic interactions between firms as they compete for labor and make decisions regarding wages and employment.
  • The model considers how changes in trade policy, such as reductions in output and input tariffs, can impact the degree of competition among firms and, consequently, labor market distortion

Measurement of labor market distortion Link to heading

Production function estimation approach: examining the relationship between the equilibrium marginal revenue product of labor (MRPL) and the wage ($w$)

  • This approach does not impose any structure on the labor market

The regression approach

  • Exploits a unique exogenous demand shifter in China’s context, namely the US-China Trade Policy Uncertainty (TPU) shock.
  • The regression identify the average labor supply elasticity of Chinese manufacturing firms. This gives us an estimate of the average endogenous distortion in model.