Trade, Market Imperfections and Labour Share

This paper shows that, redistributing the cost-price margin between workers and firms, the trade affects distribute share of labour differently between the cases with and without union under heterogeneity. The ‘generalised oligopoly framework’ is applied to investigate the effect of trade on wage and labour share mainly through three channels - market size, strategic competition and specialisation. We find that market size and competition effects jointly raise both wage and labour share without heterogeneity and labour union. But, the degree of specialisation (or comparative advantage) arising out of heterogeneous productivity distribution across sectors between trading partners dampens both of them unambiguously with union, but not without union. An increase in domestic entry for competitive policy raises wage and cannot push upto the autarky level. Further, the rise of union wage may not necessarily be higher than that without union. An expression for labour share is derived from translog specification with additional terms capturing market imperfections for empirical verification. The results on cross-country data over 182 countries for a period of 1954 to 2014 confirm that the trade weakens bargaining position of workers and explains the declining labour share unambiguously.