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CEP Discussion Paper
Trade, Wages and Productivity
Kristian Behrens, Giordano Mion, Yasusada Murata and Jens Südekum
July 2009
Paper No' CEPDP0942:
Full Paper (pdf)

JEL Classification: F12; F15; F17

Tags: firm heterogeneity; monopolistic competition; general equilibrium; endogenous markups; gravity equation system; counterfactual analysis

We develop a new general equilibrium model of monopolistic competition with heterogeneous firms, variable demand elasticity and multiple asymmetric regions, in which trade integration induces wage and productivity changes. Using Canada-US interregional trade data, we structurally estimate a theory-based gravity equation system featuring endogenous wages and productivity. Given the estimated parameter values, we first decompose border effects into a pure border effect, relative and absolute wage effects, and a selection effect. We then quantify the impacts of removing the trade distortions generated by the Canada-US border on regional market aggregates such as wages, productivity, markups, the mass of varieties produced and consumed, as well as welfare. Last, we extend the counterfactual analysis to the firm level by generating productivity distributions and their changes via simulation.

This paper has been published as:
Trade, wages and productivity, Kristian Behrens, Giordano Mion, Yasusada Murata and Jens Südekum, International Economic Review, Volume 55, Issue 4, November 2014