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Wage and Markdowns and FDI Liberalization

Author

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  • Lu, Yi
  • Sugita, Yoichi
  • 杉田, 洋一
  • Zhu, Lianming

Abstract

This paper examines whether foreign direct investment (FDI) liberalization reduces firms' monopsony power in labor markets. We estimate firm-level wage markdown, wage over marginal revenue of labor, from China's production data and identify the causal effect of FDI liberalization on wage markdown, using China's regulation changes upon its accession to the World Trade Organization. Large and productive firms, state-owned firms, exporters, and foreign firms set narrower wage markdowns. FDI liberalization widened wage markdowns and decreased labor income share in value-added. These findings are contrast to classical monopsony theory based on concentration but consistent with modern theory based on search friction.

Suggested Citation

  • Lu, Yi & Sugita, Yoichi & 杉田, 洋一 & Zhu, Lianming, 2019. "Wage and Markdowns and FDI Liberalization," Discussion paper series HIAS-E-83, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
    • Handle: RePEc:hit:hiasdp:hias-e-83
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    2. Dario Tortarolo & Roman D. Zarate, 2020. "Imperfect competition in product and labour markets. A quantitative analysis," Discussion Papers 2020-05, Nottingham Interdisciplinary Centre for Economic and Political Research (NICEP).
    3. Dobbelaere, Sabien & Kiyota, Kozo, 2018. "Labor market imperfections, markups and productivity in multinationals and exporters," Labour Economics, Elsevier, vol. 53(C), pages 198-212.
    4. Luca Macedoni, 2022. "Monopsonistic competition, trade, and the profit share," Scandinavian Journal of Economics, Wiley Blackwell, vol. 124(2), pages 488-515, April.
    5. KONDO Keisuke, 2018. "Markup and Market Size: Evidence from Japan," Discussion papers 18017, Research Institute of Economy, Trade and Industry (RIETI).
    6. Pham, Hoang, 2023. "Trade reform, oligopsony, and labor market distortion: Theory and evidence," Journal of International Economics, Elsevier, vol. 144(C).
    7. Akin A. Cilekoglu, 2023. "“Labor Market Monopsony and Firm Behavior: Evidence from Spanish Exporters”," AQR Working Papers 202304, University of Barcelona, Regional Quantitative Analysis Group, revised Jul 2023.
    8. Akin A. Cilekoglu, 2023. ""Labor Market Monopsony and Firm Behavior: Evidence from Spanish Exporters"," IREA Working Papers 202307, University of Barcelona, Research Institute of Applied Economics, revised Jul 2023.

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    Keywords

    Foreign direct investment; Monopsony; Wage; Search; Firm heterogeneity;
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