Trade Liberalization and Labor Market Adjustments: Does Rent Sharing Matter?

ABSTRACT

Using a firm-level dataset, this article investigates the impact of trade liberalization on employment and wages in Vietnamese manufacturing during 2003–2008. Different from the previous researches, we consider indirect effects of trade liberalization via real output for the employment and via rent sharing for the wage adjustments. Overall, we find empirical evidence that trade liberalization has a negative, statistically significant, but minor in magnitude effect on employment and wage. The rent-sharing approach allows a further investigation of heterogeneity in bargaining power across firms by gender and skill composition for the wage response. There exist differences in gender and skill earnings gaps but trade liberalization can moderate these gaps.

KEY WORDS:

• labor market adjustments
• manufacturing
• rent sharing
• trade liberalization

JEL:

• F16
• O12

Acknowledgments

The authors are grateful to two anonymous referees, the editor-in-chief, and seminar participants at Aichi Gakuin University for helpful comments on earlier drafts. We would also like to thank Natalia Trofimenko for editing support.

Supplementary material

Supplemental data for this article can be accessed on the publisher’s website.

Notes

1. The OECD Growth Study estimated that a 10 percentage point increase in trade openness translates over time into an increase of around 4% in per capita income in the OECD area. China and India demonstrate how policies that liberalize trade and investment can contribute to raising incomes in developing countries (OECD 2012).

2. Exporters in the United States on average pay wages that are about 6% higher than non-exporters (Bernard et al. 2007).

3. Martins (2007) define rent sharing as “referring to a situation in which rents are shared by the firm, at least in some part, with the employees of that firm”.

4. Goldberg and Pavcnik (2005) define it as the portion of individual wages that cannot be explained by worker, firm, or job characteristics, but can be explained by the worker’s industry affiliation.

5. ERP of an industry is measured by industry value added at domestic price, divided by that at world price, then minus 100% (Trinh and Thanh 2005); Import penetration ratios theoretically should be measured as the share of imports in domestic demand.

6. Goldberg and Pavcnik (2005) find that workers in protected sectors earn less than workers with similar observable characteristics in unprotected sectors when they do not control for unobserved time-invariant industry characteristics. With industry-fixed effects, the result reverses: trade protection increases relative wages.

7. Torm (2012) finds evidence that there is a substantial gender wage gap with male earnings being between 14%–18% higher than for women.

8. Torm (2012) indicates that a worker with education beyond secondary school has a wage that is about 12% higher than a worker with only basic education.