“Labor Market Institutions, Firm-specific Skills, and Trade Patterns” by Heiwai TANG
Massachusetts Institute of Technology
This paper studies how cross-country differences in labor market institutions shape the pattern of international trade with a focus on workers' skill acquisition. I develop a model in which workers undertake non-contractible activities to acquire firm-specific skills on the job. I show that protective labor laws, by increasing workers' bargaining power, induce workers to acquire more firm-specific skills relative to general skills. Hence, when sectors differ in their levels of dependence on these two types of skills, workers' skill acquisition turns labor laws into a source of comparative advantage. To formalize this argument, I embed the model in an open-economy framework with heterogeneous firms, sectors with different levels of dependence on firm-specific skills, and countries with varying degrees of labor protection. The model predicts that countries with more protective labor laws export relatively more in firm-specific skill-intensive sectors through both the intensive and extensive margins of trade. While the intensive margin refers to the export volume per firm, the extensive margin refers to the number of exporting firms. To test these hypotheses, I construct sector measures of firm-specific skill intensity using estimated returns to firm tenure in the U.S. over 1985-1993. With these measures, I test the theoretical predictions by estimating sector-level gravity equations. Specifically, I implement a two-stage estimation procedure, with the first stage being a selection equation testing the extensive margin of trade, and the second stage being a trade flow equation testing the intensive margin. From a sample of 84 countries in 1995, I find supporting evidence for the predicted effects of labor market institutions on both margins of trade.