# **1. Introduction**

It  is  a  well-­‐established  empirical  regularity  in  the  international  economics  literature  that even  within  narrowly-­‐defined  industries,  globally-­‐engaged  firms  and  domestic  firms  differ in  terms  of  their  productivity,  size,  employment  composition,  and  wages  (Bernard  and Jensen  (1995,  1997)  and  Bernard,  Jensen,  and  Schott  (2009)).<sup>1</sup> In  the  presence  of  such heterogeneity,  trade  liberalization  will  induce  inter-­‐firm  reallocations  within  an  industry  as the  more  productive,  exporting,  firms  expand  and  the  least  productive  firms  shrink  or  exit the  industry  (Melitz,  2003).  In  an  environment  with  labor  market  frictions,  this  within-­‐ industry  reallocation  can  have  distributional  consequences  for  workers  employed  in  firms with  differing  levels  of  global  engagement.

The  international  trade  literature  has  discussed  the  putative  impact  of  trade  liberalization on  wages  at  different  levels  of  aggregation,  examining  this  question  alternately  at  the  level of  the  firm  and  at  the  level  of  the  individual  worker.   There  are  various  channels  through which  a  decline  in  trade  protection  could  result  in  differential  changes  in  average  wages  at exporting  firms  relative  to  firms  selling  only  to  the  domestic  market.  For  instance,  if liberalization  is  associated  with  a  change  in  relative  returns  to  worker  characteristics,<sup>2</sup> differences  in  work  force  composition  will  imply  that  average  firm-­‐level  wages  in  exporting firms  will  change  differentially  relative  to  domestic  firms  following  liberalization.  If  trade liberalization  does  not  affect  the  returns  to  worker  characteristics,  a  differential  wage  effect may,  nevertheless,  be  observed  if  changes  in  trade  policy  induce  compositional  changes  in the  workforce  of  exporting  firms  that  are  different  from  those  in  non-­‐exporting  firms.<sup>3</sup> 1  Recent  work  extends  the  findings  of  Bernard  and  Jensen  (1995)  using  matched  employer-­‐employee data  for  Germany  (Schank,  Schnabel,  and  Wagner  (2007)  and  Klein,  Moser,  and  Urban  (2010)), Denmark  (Munch  and  Skaksen  2008),  and  Mexico  (Frías,  Kaplan,  and  Verhoogen  2009).  See  also Hummels,  Jorgensen,  Munch  and  Xiang  (2010)  for  analysis  of  the  impact  of  outsourcing  on  wages  and employment  using  matched  employer-­‐employee  data  from  Denmark.

2  A  vast  empirical  literature  has  examined  the  effects  of  globalization  on  the  wage  outcomes  of workers  in  the  domestic  economy  with  a  particular  focus  on  the  important  question  of  how  trade affects  the  average  wages  of  workers  with  different  levels  of  skill.  Classic  papers  in  this  literature include  Lawrence  and  Slaughter  (1993),  Leamer  (1996),  and  Feenstra  and  Hanson  (1999).  Revenga (1997),  Currie  and  Harrison  (1997),  and  Trefler  (2004)  analyze  the  effect  of  trade  liberalization  on firm-­‐level  wages  in  Mexico,  Morocco,  and  Canada,  respectively,  with  mixed  results.  Feenstra  and Hanson  (2002)  and  Goldberg  and  Pavcnik  (2007)  provide  excellent  survey  treatments.

3  An  expansion  in  exports  could  result  in  differential  labor  quality  upgrading  in  exporting  firms,  for example,  by  inducing  these  firms  to  adopt  technologies  favoring  highly  skilled  workers,  as  in  Yeaple (2005)  and  Bustos  (2011),  or  by  inducing  these  firms  to  upgrade  product  and  hence  labor  quality  as in  Verhoogen  (2008)  and  Kugler  and  Verhoogen  (2008).

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