The Decision to Export in the Presence of Underemployment * by

In a model with search generated unemployment and heterogeneity on both sides of the labor market, we show that firms that export will be bigger, more capital intensive and pay higher wages than other firms. We also show that there will be imperfect persistence in the decision to export and that liberalization increases the wage gap between high and low skill workers. We also explore the relationship between openness and productivity and show that in export-oriented markets openness can increase aggregate productivity while generating within-firm productivity losses for the weakest firms. Finally, we show that openness can lead to within-firm productivity gains for the weakest firms in import-competing industries. * We have benefited from discussions and correspondence with Nina Pavcnik, James Tybout and Susan Zhu. We are grateful for the help that they have provided. Corresponding Author: Carl Davidson; Department of Economics; Michigan State University; East Lansing, MI 48824. Phone: 517.355. 7756; Email: davidso4@msu.edu. Even within narrowly defined industries, firms that produce similar products often use technologies with different levels of sophistication, employ different occupational mixes of workers and pay different wages. If one looks for patterns across firms, then recent findings suggest that firms that adopt more modern technologies tend to employ more highly-skilled workers and pay higher wages than their counterparts (Doms, Dunne and Troske 1997). The purpose of this paper is to show that by combining this insight with the fact that unemployed workers must search for jobs, we are able to develop a simple model of a product market that is consistent with a large number of the stylized facts about industry dynamics in open economies and the impact of openness on productivity and wages. The stylized facts that we are concerned with can be found in two related strands of the literature. First, over the past decade a variety of firm and plant level industry studies have established that there are significant differences between firms that export and those that do not. Exporting firms are typically larger, more capital intensive, more productive and pay higher wages than their counterparts (Bernard and Jensen 1999a). These studies also indicate that there is “imperfect persistence” in the decision to export in that firms often change their export position from one period to the next (Roberts and Tybout 1997, Bernard and Jensen 1999a). Second, related studies have focused on the impact of openness on productivity at the firm and industry levels. One key finding is that openness tends to enhance productivity, although it is unclear why. At least three possible explanations have been offered. First, openness may allow exporting firms to take advantage of scale effects as they expand. Second, there may be increases in total factor productivity at the firm level, perhaps due to “learn-byexporting. ” Third, since more efficient firms tend to export, liberalization may lead to a 1 These studies also find that firms typically export only a fraction of their output (Bernard and Jensen 1999a). This feature is absent from our model for reasons discussed in footnote 5 below. 2 For a survey of this literature see Tybout (2003).