Applied Micro Seminar - Mathilde Munoz

Abstract: This paper studies how differences in labor market regulations (“standards”) shape countries comparative  advantage in trade-in-services, using administrative data on cross-border supply of services within Europe from 2004 to 2020. I exploit exogeneous variations in labor taxes and minimum wages faced by exporting firms engaged in a large trade program: the European posting policy. To avoid a “race to the bottom” in so-cial standards, this EU policy stipulated that exporting firms must comply with minimum wages and labor taxes in the importing countries in order to access foreign markets, and those prevailing rules vary across countries, sectors, and over time. Both reduced-form countries case-studies and theory-consistent gravity estimation show evidence of large trade responses to higher labor standards, with an elasticity that is above one. On average, a 1% increase in exporting firms’ labor cost through labor standards harmonization reduces bilateral trade flows in services by 1.1%. I show that a proposal to abolish the “social standards”
constraint applied to firms engaged in the program decreased support for EU integration in rich countries, suggesting that voters reject the idea that trade should be based on comparative advantages created by differences in institutional choices and labor market regulations.

Link to paper.

Location: IFS Basement Seminar Room.

Meet the speaker.