# **4.  HETEROGENEITY AND IMPERFECT COMPETITION**

Wacziarg and Wallack’s results (2004) are also consistent with more recent findings for developed countries. Thus, Bernard et al. (2003), using the US Census of Manufactures, conclude that liberalization had a significant impact on aggregate trade, but that this was not accompanied with sectoral reallocations. Although Wacziarg and Wallack and similar findings appear to discount large-scale intersectoral movements of labor, they do not preclude the existence of significant _intra_ sectoral effects. Indeed, micro-econometric analyses that use firmlevel data conclude that there is significant turnover of firms within industries. The implication is that intrasectoral firm heterogeneity may be more important than intersectoral differences when discussing the effects of trade liberalization.

Although the majority view is that SBTC explains the lion’s share of observed reduction in the relative return to low-skilled labor—and increases in unemployment in countries where wages are rigid—e.g., in Germany) (Heitger and Stehn 2003), the factor-content studies noted above established a presumption that labor markets outcomes are affected by international trade, although it is left unclear what the channels are through which this occurs (Greenaway and Nelson 2001, Francois 2004).<sup>12</sup> Recent papers increasingly conclude that (the threat of) competition drives enterprises to improve productivity and that quality of output is likely to have an important role in determining labor market effects. The simple Heckscher-Ohlin prediction that trade results in a redistribution of employment away from the import substituting towards export-oriented production assumes a world of homogenous firms/products and inter-industry specialization/trade. In practice most trade is of the intraindustry type, reflecting the exchange of differentiated products between countries with very

> 12 Neary (2001) notes that it is not clear how compelling the SBTC finding is either in explaining the stylized facts. He argues that in a competitive HOS type setting this should benefit disproportionately the unskilled labor-intensive (import competing) sector and reduce the skill premium, which is not observed. SBTC while detrimental to unskilled workers, should benefit sectors that employ such labor intensively, lowering their costs and thus their prices, which is also not observed. Nor can it be argued that SBTC is only important in skill-intensive sectors, as the skilled to unskilled employment ratios have risen in _all_ sectors. The solution he offers is to consider the issue in an imperfectly competitive model where trade liberalization encourages both exporting and import-competing firms to invest and raise their productivity. Insofar as such investment requires relatively more skilled labour, trade openness raises the demand for skilled labor in _both_ exporting and importing countries, independent of wages or changes in import volumes. He stresses that any change which intensifies the degree of competition in international markets— including technological progress itself—is likely to manifest themselves in more intense competition. Thus, empirically disentangling the effects of trade and technology will always be difficult.

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