No. 7494: Exporting and Labor Demand: Micro-Level Evidence from Germany
revised version published in: Canadian Journal of Economics, 2017, 50 (4), 1161-1189
It is widely believed that globalization increases the volatility of employment and decreases the bargaining power of workers. One mechanism explaining this relationship is given by the long-standing Hicks-Marshall laws of derived demand: with international trade increasing competition and therefore the price elasticity of product demand, exporters are predicted to have higher labor demand elasticities. Our paper is the first to test this relationship empirically by analyzing the effects of exporting on firms' labor demand. Using rich, administrative linked employer-employee panel data from Germany, we explicitly control for issues of self-selection and endogeneity in the firms' decisions to export by providing fixed effects and instrumental variable estimates. Our results show that exporting indeed has a positive and significant effect on the own-wage elasticity of unconditional labor demand, due to higher price elasticities of product demand.