Skill Acquisition, Incentive Contracts and Jobs: Labor Market Adjustment to Trade

Sly, Nicholas (2010): Skill Acquisition, Incentive Contracts and Jobs: Labor Market Adjustment to Trade.

Abstract

This paper examines how global integration influences worker behavior regarding skill acquisition, as well as firm behavior regarding incentive contracts and occupational diversity. The approach integrates several key components of international trade and the wage distribution in developed countries: namely heterogeneous firms, trade in similar goods, and performance payments to workers that endogenously obtain different skill levels. Greater trading opportunities reduce aggregate prices, causing workers to experience a greater marginal utility derived from income, as well as the skills that aid them in fulfilling performance contracts. Firms respond to skill accumulation among the labor force by adjusting the provision of incentive contracts, and the types of jobs they offer. Labor market adjustment to trade liberalization is characterized by a more steep, but less extensive, provision of incentive contracts among the labor force; higher overall wage inequality exhibiting a U-shaped differential; and job polarization across skill-groups.

• Item Type: MPRA Paper
• Language: English
• Keywords: Job Polarization, Performance Pay, Trade Adjustment
• Subjects: F - International Economics > F1 - Trade > F16 - Trade and Labor Market Interactions; J - Labor and Demographic Economics > J8 - Labor Standards: National and International; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J24 - Human Capital ; Skills ; Occupational Choice ; Labor Productivity

References

Abowd, John M. and Francis Kramarz, “The analysis of labor markets using matched employer- employee data,” in Orley Ashenfelter and David Card, eds., Handbook of Labor Economics, Vol. 3B, Amsterdam: Elsevier North-Holland, 1999. Acemoglu, Daron, “Technical change, inequality and the labor market,” Journal of Economic Literature, 2002, 40 (1), 7–72. Antr`as, Pol, Luis Garicano, and Esteban Rossi-Hansberg, “Offshoring in a knowledge economy,” The Quarterly Journal of Economics, 2006, 121 (1), 31–77. Attansio, Orazio, Pinelopi K. Goldberg, and Nina Pavcnik, “Trade reforms and wage inequality in Colombia,” Journal of Development Economics, 2004, 74 (2), 331–366. Autor, David H., Lawrence F. Katz, and Mellisa S. Kearney, “The polarizaiton of the U.S. labor market,” The American Economic Review, 2006, 96 (2), 189–194. , , and , “Trends in U.S. wage inequality: Revising the revisionists,” The Review of Economics and Statistics, 2008, 90 (2), 300–323. Bandiera, Oriana, Iwan Barankay, and Imran Rasul, “Incentives for managers and inequality among workers: evidence from a firm-level experiment,” The Quarterly Journal of Economics, 2007, 122 (2), 729–773. Bawa, Vijay S., “Optimal rules for ordering uncertain prospects,” Journal of Financial Economics, 1975, 2 (1), 95–121. Bayo-Moriones, Alberto, Jose Enrique Galdon-Sanchez, and Sara Martinez de Morentin, “The diffusion of pay for performance across occupations,” 2010. IZA discussion paper 4839. Bernard, Andrew B. and J. Bradford Jensen, “Exporters, skill upgrading and the wage gap,” Journal of International Economics, 1997, 42, 3–31. and , “Exceptional exporter performance: cause, effect or both?,” Journal of International Economics, 1999, 47 (1), 1–25. 32 , , and Robert Z. Lawrence, “Exporters, jobs and wages in U.S. manufacturing: 1976-1987,” Brook- ings Papers on Economic Activity. Microeconomics, 1995, pp. 67–119. Bombardini, Matilde, Giovanni Gallipoli, and Germ´an Pupato, “Skill dispersion and trade flows,” 2009. University of British Columbia. Borjas, George J., “The labor demand curve is downward sloping: Reexamining the impact of immigration on the labor market,” The Quarterly Journal of Economics, 2003, 118 (4), 1335–74. , Richard B. Freeman, and Lawrence F. Katz, “How much do immigration and trade affect labor market outcomes,” Brookings Papers on Economic Activity, 1997, pp. 1–67. Bougheas, Spiros and Raymond Riezman, “Trade and the distribution of human capital,” Journal of International Economics, 2007, 73 (2), 421–433. Bresnahan, Timothy F., Erik Brynjolfsson, and Lorin M. Hitt, “Informaiton technology, workplace organization, and the demand for skilled labor: firm-level evidence,” The Quarterly Journal of Economics, 2002, 117 (1), 339–376. Burgess, Simon, Julia Lane, and David Stevens, “Job flows, worker flows and churning,” Journal of Labor Economics, 2000, 18 (3), 473–502. Burstein, Ariel and Jonathan Vogel, “Globalization, technolgoy and the skill-premium,” 2009. Columbia University. Cosar, A. Kerem, Nezih Guner, and James Tybout, “Firm dynamics, job turnover and wage distri- butions in an open economy,” 2009. The Pennsylvania State University. Costinot, Arnaud and Jonathan Vogel, “Matching and inequality in the world economy,” Journal of Political Economy, forthcoming. Cunat, Alejandro and Marc J. Melitz, “Volatility, labor market flexibility and the pattern of compar- ative advantage,” Journal of the European Economics Association, forthcoming. Cunat, Vincent and Maria Guadalupe, “How dow product market competition shape incentive con- tracts?,” Journal of the European Economics Association, 2005, 3 (5), 1058–1082. and , “Globalization and the provision of incentives inside the firm: The effect of foreign compeition,” Journal of Labor Economics, 2009, 27 (2), 179–212. Davidson, Carl and Nicholas Sly, “Trade and the labor market: Recent developments and new frontiers,” 2010. Michigan State University. and Steven J. Matusz, International trade with equilibrium unemployment, Princeton University Press, 2009. , Lawrence Martin, and Steven J. Matusz, “Trade and search generated unemployment,” Journal of International Economics, 1999, 48 (2), 271–299. , Steven J. Matusz, and Andrei Shevchenko, “Globalization and firm level adjustment with imperfect labor markets,” Journal of International Economics, 2008, 75 (2), 295–309. Davis, Donald R. and James Harrigan, “Good jobs, bad jobs, and trade liberalization,” 2008. Columbia University. Davis, Steven J., John C. Haltiwanger, and Scott Schuh, Job creation and destruction, The MIT Press, 1998. 33 Dunne, Timothy, Lucia Foster, John Haltiwanger, and Kenneth R. Troske, “Wage and prodic- itivity dispersion in United States Manufacturing: the role of computer investment,” Journal of Labor Economics, 2004, 22 (2), 397–429. Dustmann, Christian, Johannes Ludsteck, and Uta Sch¨ onberg, “Revisiting the German wage struc- trure,” The Quarterly Journal of Economics, 2009, 124 (2), 843–881. Egger, Hartmut and Udo Kreickemeier, “Firm heterogeneity and the labor market effects of trade liberalization,” International Economic Review, 2009, 50 (1), 187–216. Falvey, Rod, David Greenaway, and Joana Silva, “International competition, returns to skill and labor market adjustment,” 2008. University of Nottingham Research paper No. 2008/10. , , and , “Trade liberalization and human capital adjustment,” Journal of International Economics, 2010, 81 (2), 230–39. Feenstra, Robert C. and Gordon H. Hanson, “Global production sharing and rising inequality,” in E. Kwan Choi and James Harrigan, eds., Handbook of International Trade, Vol. 1, Blackwell Publishing Ltd, 2003, p. 146. Fr´ıas, Judith, David S. Kaplan, and Eric A. Verhoogen, “Exports and wage premia: evidence from Mexican employer-employee data,” 2009. Columbia University. Goldberg, Pinelopi K. and Nina Pavcnik, “Trade, inequality and poverty: what do we know? eveidence from recent trade liberalization episodes in developing countries,” Brookings Trade Forum, 2004, pp. 223– 269. and , “Distributional Effects of Globalization in Developing Countries,” Journal of Economic Litera- ture, 2007, 45 (1), 39–82. Goldin, Claudia and Lawrence F. Katz, The race between education and technology, Belknap Press of Harvard University Press, 2008. Goos, Maarten, Alan Manning, and Anna Salomons, “Job polarization in Europe,” The American Economic Review, 2009, 99 (2), 58–63. and , “Lousy and lovely jobs: the rising polarization of work in Britain,” The Review of Economics and Statistics, 2007, 89 (1), 118–133. Grossman, Gene M., “The distribution of talent and the pattern and consequences of international trade,” Journal of Political Economy, 2004, 112 (1), 209–239. and Giovanni Maggi, “Diversity and trade,” The American Economic Review, 2000, 90 (5), 1255–1275. Guadalupe, Maria and Julie Wulf, “The flattening firm and product market competition: the effect of trade liberalization on corporate hierarchies,” American Economic Journal: Applied Economics, forth- coming. Helpman, Elhanan, Oleg Itskhoki, and Stephen Redding, “Inequality and unemployment in a global economy,” Econometrica, 2010, 78 (4), 1239–1283. Kim, Jaesoo, “Endogenous leadership in principal-agent models,” 2010. working paper IUPUI. and Nicholas Sly, “Job mix, performance pay and matching outcomes: Contracting with multiple heterogeneous agents,” 2010. Universtiy of Oregon. Kopczuk, Wo jciech, Emmanuel Saez, and Jea Song, “Earnings inequality and mobility in the United States: evidence from social security data since 1937,” The Quarterly Journal of Economics, 2010, 125 (1), 91–128. 34 Krishna, Pravin and Mine Zeynep Senses, “International trade and labor income risk in the United States,” 2009. NBER working paper 14992. Lambert, Peter J., The distribution and redistribution of income: a mathematical analysis, 2 ed., Manch- ester University Press, 1993. Lazear, Edward P., “Performance pay and productivity,” The American Economic Review, 2000, 90 (5), 1346–1361. Legros, Patrick and Andrew F. Newman, “Beauty is a beast, frog is a prince: assortative matching with nontransferabilities,” Econometrica, 2007, 75 (4), 1073–1102. Lemieux, Thomas, “Increasing residual wage inequality: composition effects, noisy data, or rising demand for skill?,” The American Economic Review, 2006, 96 (3), 461–498. , “The changing nature of wage inequality,” 2007. University of British Columbia. , W. Bently MacLeod, and Daniel Parent, “Performance pay and wage inequality,” The Quarterly Journal of Economics, 2009, 124 (1), 1–49. Manasse, Paolo and Alessandro Turrini, “Trade, wages and ’superstars’,” Journal of International Economics, 2001, 54 (1), 97–117. Matusz, Steven J., “International trade, the division of labor, and unemployment,” International Eco- nomic Review, 1996, 37 (1), 71–84. Melitz, Marc, “The impact of trade on intra-industry reallocations and aggregate industry productivity,” Econometrica, 2003, 71 (6), 1695–1725. Menezes-Filho, Na´ercio Aquino, Marc-Andreas Muendler, and Garey Ramey, “The structure of worker compensation in Brazil, with a comparison to France and the United States,” The Review of Economics and Statistics, 2008, 90 (2), 324–346. Roberts, Mark J. and James R. Tybout, “The decision to export in Colombia: an empirical model of entry with sunk costs,” The American Economic Review, 1997, 87 (4), 545–564. Rodrik, Dani, Has globalization gone too far?, Washington, D.C.: Institute for International Economics, 1997. Shorrocks, Anthony F., “Ranking Income Distributions,” Economica, 1983, 50 (1297), 3–17. Sly, Nicholas, “Labor matching behavior in open economies and trade adjustment,” 2009. University of Oregon. Verhoogen, Eric A., “Trade, quality upgrading, and wage inequality in the Mexican manufacturing sector,” The Quarterly Journal of Economics, 2008, 123 (2), 489–530. Vogel, Jonathan, “Institutions and moral hazard in open economies,” Journal of International Economics, 2007, 71 (2), 495–514. Yeaple, Stephen R., “A simple model of firm heterogeneity, international trade, and wages,” Journal of International Economics, 2005, 65 (1), 1–20.