DP7369 Trade, wages, and productivity

Author(s): Kristian Behrens, Giordano Mion, Yasusada Murata, Jens S├╝dekum
Publication Date: July 2009
Keyword(s): counterfactual analysis, endogenous markups, firm heterogeneity, general equilibrium, gravity equation system, monopolistic competition
JEL(s): F12, F15, F17
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7369

We develop a new general equilibrium model of monopolistic competition with heterogeneous firms, variable demand elasticity and multiple asymmetric regions, in which trade integration induces wage and productivity changes. Using Canada-US interregional trade data, we structurally estimate a theory-based gravity equation system featuring endogenous wages and productivity. Given the estimated parameter values, we first decompose ?border effects? into a ?pure? border effect, relative and absolute wage effects, and a selection effect. We then quantify the impacts of removing the trade distortions generated by the Canada-US border on regional market aggregates such as wages, productivity, markups, the mass of varieties produced and consumed, as well as welfare. Last, we extend the counterfactual analysis to the firm level by generating productivity distributions and their changes via simulation.