DP8727 Trade, Wages, and Profits

Author(s): Peter Egger, Hartmut Egger, Udo Kreickemeier
Publication Date: December 2011
Keyword(s): Exporter wage premium, Fair wages, Heterogeneous firms, Labour market imperfections, Structural models
JEL(s): C31, F12, F16, J31
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8727

This paper formulates a structural empirical model of heterogeneous firms whose workers exhibit fair-wage preferences. In the underlying theoretical framework, such preferences lead to a link between a firm's operating profits on the one hand and wages of workers employed by this firm on the other hand. The latter establishes an exporter wage premium, since exporters have higher profits, given their productivity, than non-exporting firms. We estimate the parameters of the model in a data-set of five European economies and find that, when evaluated at these parameter values, the model has a high level of explanatory power. The estimates also enable us to quantify the exporter wage premium and the consequences of trade for the main variables of interest. According to our results, openness to international trade contributes to greater inequality across firms in terms of both operating profits and average wages. We also find evidence for gains from trade for all five countries, which go along with negative, but quantitatively moderate, aggregate employment effects.