# **Trade   Liberalization,   Firm   Heterogeneity,   and   Wages: New   Evidence   from   Matched   Employer–Employee   Data**<sup>*****</sup>

Pravin  Krishna _Johns  Hopkins  University  and  NBER_ Jennifer  P.  Poole _University  of  California,  Santa  Cruz_ Mine  Zeynep  Senses _Johns  Hopkins  University_ June  2011

**Abstract**

In  this  paper,  we  use  a  linked  employer–employee  database  from  Brazil  to  examine  the impact  of  trade  reform  on  the  wages  of  workers  employed  at  heterogeneous  firms.   Our analysis  of  the  data  at  the  firm-­‐level  confirms  earlier  findings  of  a  differential  positive  effect of  trade  liberalization  on  the  average  wages  at  exporting  firms  relative  to  non-­‐exporting firms.  However,  this  analysis  of  average  firm-­‐level  wages  is  incomplete  along  several dimensions.  First,  it  cannot  fully  account  for  the  impact  of  a  change  in  trade  barriers  on workforce  composition  especially  in  terms  of  unobservable  (time-­‐invariant)  characteristics of  workers  (innate  ability)  and  any  additional  productivity  that  obtains  in  the  context  of employment  in  the  specific  firm  (match  specific  ability).   Furthermore,  the  firm-­‐level analysis  is  undertaken  under  the  assumption  that  the  assignment  of  workers  to  firms  is random.  This  ignores  the  sorting  of  worker  into  firms  and  leads  to  a  bias  in  estimates  of  the differential  impact  of  trade  on  workers  at  exporting  firms  relative  to  non-­‐exporting  firms. Using  detailed  information  on  worker  and  firm  characteristics  to  control  for  compositional effects  and  using  firm-­‐worker  match  specific  effects  to  account  for  the  endogenous  mobility of  workers,  we  find  the  differential  effect  of  trade  openness  on  wages  in  exporting  firms relative  to  domestic  firms  to  be  insignificant.  Consistent  with  the  models  of  Helpman, Itskhoki,  and  Redding  (2010)  and  Davidson,  Matusz  and  Schevchenko  (2008),  we  also  find that  the  workforce  composition  improves  systematically  in  exporting  firms  in  terms  of innate  (time  invariant)  worker  ability  and  in  terms  the  quality  of  the  worker-­‐firm  matches.

**Keywords:** Trade   liberalization,   firm   heterogeneity,   linked   employer-­‐employee   data. **JEL   Classification:** F16

> *   Our   special   thanks   to   Paulo   Furtado   de   Castro   for   help   with   the   RAIS   and   SECEX   data,   to   Marc-­‐ Andreas   Muendler   for   sharing   three-­‐firm   random   aggregates   from   the   PIA   data,   and   to   the Department   of   Economics   and   Academic   Computing   Services   at   the   University   of   California,   San Diego   for   assistance   with   data   access.   Pravin   Krishna   and   Jennifer   Poole   were   visiting   scholars   in   the International   Trade   Division   of   the   Development   Research   Group   of   the   World   Bank   while   work   on this   paper   was   conducted   and   acknowledge   the   funding   support   of   the   World   Bank   executed   Multi-­‐ Donor   Trust   Fund   on   Trade.

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