Working Paper: NBER ID: w23834
Authors: Carsten Eckel; Stephen R. Yeaple
Abstract: Ex-post firm heterogeneity can result from different strategies to overcome labor market imperfections by ex-ante identical firms—with far-reaching consequences for the welfare effects of trade. With asymmetric information about workers’ abilities and costly screening, in equilibrium some firms screen and pay wages based on the true productivity of their workers, and some firms do not screen and pay wages based on the average productivity of their workforce. Screening firms are larger, attract better workers and pay lower effective wages. This results in excessive consumption of resources by large firms relative to the social optimum. Trade liberalization then has an ambiguous effect on aggregate welfare: lower trade costs improve access to foreign goods but also exacerbate the labor market distortion as more resources are transferred to large firms. The model highlights the need to know why firms “excel” before drawing welfare conclusions regarding cross firm reallocations of resources.
Keywords: labor market imperfections; exporter performance; welfare implications; trade liberalization
JEL Codes: F1; F16; J31; J42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Labor market imperfections (J42) | ex-post differences in firm size and productivity (L25) |
| Screening workers (J81) | firm size (L25) |
| Screening workers (J81) | productivity (O49) |
| firm size (L25) | effective wages (J31) |
| Resource reallocation towards large firms (D25) | negative welfare effect (D62) |
| Trade liberalization (F13) | ambiguous effects on aggregate welfare (D69) |
| Larger firms benefit more from trade liberalization (F12) | exacerbates income inequality (D31) |
| Misallocation of labor (J29) | incentives for subsidies to small firms (H32) |