Input Trade Liberalization and Firms’ Labor Market Power

¹YU Miaojie:Liaoning University

²XIE Enze,National School of Development,Peking University

Abstract：

Before and after joining the WTO in 2001, China slashed import tariffs and liberalized trade. However, at the same time, the proportion of China's labor income has been declining, and the lag of labor compensation growth has been increasing. To explain this phenomenon, existing literature explored the impact of trade liberalization on China's labor income, labor productivity, and labor income share. However, these studies ignored the imperfect competitiveness of the labor market. Labor economics literature highlighted that when the labor market is not perfectly competitive, firms can use their market power in the labor market to lower wages below the value created by workers, resulting in wage markdown, and ultimately reducing labor income. Therefore, based on the imperfect competitiveness of the labor market, this paper explores the impact of trade liberalization, represented by import tariff reductions, on the firms' labor market power, complementing existing literature on the influence of trade on labor income share.This paper uses the matching data of China's industrial enterprise database and customs database from 2000 to 2006 for empirical research. The empirical results show that the reduction of intermediate input import tariffs has both a cost saving effect and a factor substitution effect. Specifically, when the tariff on intermediate inputs falls, firms can import them at a lower price, which is reflected in the increase in the proportion of imported intermediate inputs of enterprises, and at the same time move to the upstream industries that use these inputs more intensively, such that the output scale of firms expands and, ultimately, firms' market power in the labor market increases. At the same time, the reduction of import tariffs on final goods has no significant impact on the firms' labor market power.The contribution of this e labor market increases. At the same time, the reduction of import tariffs on final goods has no significant impact on the firms' labor market power.The contribution of this elabor market increases. At the same time, the reduction of import tariffs on final goods has no significant impact on the firms' labor market power.The contribution of this paper to existing literature relates to the following three aspects. First, this paper more accurately measures the level of trade liberalization of intermediate inputs faced by firms. Since Chinese firms often import a variety of products and cover multiple industries, industry tariffs cannot accurately reflect the true trade barriers faced by firms.At the same time, the construction of intermediate input tariffs at the industry level requires the use of input-output tables. On the one hand, this would mix domestic intermediate inputs with imported intermediate inputs, where the former is not directly affected by trade liberalization. On the other hand, the construction of the input-output table is based on large-scale enterprises, which will cause sample selection problems. In addition, during the sample period, processing trade firms accounted for a large proportion of China's total trade. Because these firms do not need to pay tariffs when importing raw materials and intermediate inputs, there are clear measurement errors in using industry tariffs to measure the level of trade liberalization faced by firms. Second, this paper explores the mechanism by which intermediate import tariffs affect firms' labor market power. The reduction of import tariffs on intermediate inputs has both a cost saving effect and a factor substitution effect, which affects the firms' market.power by influencing the output scale, the proportion of factor inputs, and the position in the industrial production chain. Finally, this paper supplements the literature on the decline of labor's income share and the deviation of labor compensation from labor's contribution to production. This paper has strong policy implications. While promoting trade liberalization, firms' collusion in the labor market should be limited, and diversified and comprehensive vocational training and public services should be provided. Moreover, the labor market should be more mobile and competitive to protect workers' rights and interests.

Keywords：Input Trade Liberalization; Labor Market Power; Wage Markdown