DP7369 Trade, wages, and productivity

Author(s): Kristian Behrens , Giordano Mion , Yasusada Murata , Jens Südekum

Publication Date: July 2009

Keyword(s): endogenous markups , counterfactual analysis , 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: www.cepr.org/pubs/dps/DP7369.asp.asp

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.