# reforms.

We  begin  our  analysis  by  exploring  the  behavior  of  average  firm-­‐level  wages  and  find  that  a decline  in  trade  protection  is  associated  with  an  increase  in  average  wages  in  exporting firms  relative  to  domestic  firms,  consistent  with  the  findings  of  Amiti  and  Davis (forthcoming)  for  the  liberalization  period  in  Indonesia<sup>5</sup> .   However,  we  argue  that  the analysis  of  average  firm-­‐level  wages,  although  informative,  is  incomplete  along  several dimensions.  First,  it  cannot  fully  account  for  the  impact  of  a  change  in  trade  barriers  on workforce  composition  in  terms  of  both  observable  worker  characteristics  (not  available  in firm-­‐level  datasets),  as  well  as  factors  that  are  observable  to  the  managers  of  the  firm  and hence  impact  wages  but  are  unobservable  in  the  data,  such  as  the  innate  ability  of  the worker  and  any  additional  productivity  (ability)  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  and ignores  the  sorting  of  worker  into  firms  and  the  resulting  change  in  the  distribution  of match-­‐specific  ability  in  different  firms.  Using  matched  employer-­‐employee  data,  we  test whether  wage  behavior  at  the  worker  level  confirms  the  maintained  assumption  of exogenous  worker  mobility,  as  in  Abowd,  McKinney  and  Schmutte  (2010).  Consistent  with theoretical  models  emphasizing  search  dynamics  or  other  frictions  as  important determinants  of  the  relationship  between  trade  liberalization  and  wages  such  as  Helpman, Itskhoki,  and  Redding  (2010)  and  Davidson,  Matusz  and  Schevchenko  (2008),  we  find  that the  data  decisively  reject  the  assumption  of  exogenous  job  mobility.

Importantly,  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 5  To  our  knowledge  Amiti  and  Davis  (forthcoming)  is  the  first  paper  to  incorporate  firm-­‐level heterogeneity  in  empirically  studying  the  impact  of  trade  liberalization  on  wages.  They  introduce  a general  equilibrium  model,  which  combines  firm  heterogeneity  in  exporting  patterns,  trade  in intermediate  inputs,  and  firm-­‐specific  wages.  The  latter  is  incorporated  into  the  model  by  assuming  a fair-­‐wage  specification  that  results  in  a  direct  link  between  firm  wages  and  firm  profitability.  The model  predicts  that  a  decline  in  final  goods  tariffs  reduces  the  wages  of  workers  at  firms  that  sell only  in  the  domestic  market,  but  raises  the  wages  of  workers  at  firms  that  export.  Consistent  with  the model,  they  find  differential  changes  in  average  firm-­‐level  wages  across  Indonesian  firms  with different  levels  of  global  engagement  following  liberalization,  which  they  attribute  wholly  to  firm performance.

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