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Working Paper - Trade Liberalization, Labor Market Power, and Misallocation across Firms: Quantitative Evidence from China’s WTO Accession

Date: 2022-11-19    Source: 

No. 2022005                                                                     

November 2022


Enze Xie, Mingzhi Xu and Miaojie Yu



We study the effect of heterogeneous monopsony power across Chinese firms on the equilib- rium allocation of labor. The analysis finds that heterogeneity in monopsony power results from the heterogeneity in workers’ preferences for the jobs provided by an individual firm. We build a model to derive that the variance in logarithmic markdown serves as a sufficient statistic that can be used to infer the impact of heterogeneous monopsony power on overall production efficiency at the national level. We further quantify the welfare effect associated with labor reallocation after China joined the World Trade Organization in 2001. The empirical results suggest that lower input tariffs decrease the level of misallocation in the labor market, which is captured by the decreased variance in logarithmic markdown. In contrast, a reduction in output tariffs has no significant effect. Overall, the improved allocation of labor accounts for 5% of the total production efficiency gains from China’s trade liberalization.

Keywords: heterogeneous monopsony power, misallocation, trade liberalization, markdown distribution

JEL CodesF12, F14, F16, J42


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