their  labor  force  in  response  to  liberalization,<sup>34</sup> analysis  conducted  at  the  firm  level  faces  at least  two  problems.  If  exporting  firms  respond  to  liberalization  by  changing  the composition  of  their  workforce  systematically,  (for  example,  towards  workers  with  higher innate  ability  or  match-­‐specific  ability)  our  estimates  will  be  biased.  This  is  because  part  of the  differential  effect  we  find  for  exporters  at  the  firm-­‐level  could  be  due  to  compositional differences  between  firms  with  different  trade  orientation  and  not  because  otherwise identical  workers  are  being  paid  different  wages  in  different  firms.  Furthermore,  when  the job  mobility  of  workers  is  at  least  partly  determined  by  their  unobservable  characteristics (endogenous  mobility),  estimates  of  the  parameters  in  (1)  will  be  biased.  This  is  because non-­‐random  job  assignment  implies  a  correlation  between  the  error  term ε _jt_ (which subsumes  the  un-­‐observables  associated  with  workers  in  firm _j_ at  time _t_ )  and  the  firm’s characteristics  represented  by  the  right  hand  side  variables, Ψ _j_ and _Z jt_ ,  and  thus  a  failure of  the  maintained  assumption, _E_ (ε _jt_ | Ψ _j_ , _Z jt_ ) = 0 ,  underlying  the  estimation.

In  the  following  section,  we  describe  the  worker-­‐level  analysis  we  undertake  using  matched employer-­‐employee  data  to  account  for  the  issues  of  unobservable  worker  ability differences  and  endogenous  job  mobility  that  we  have  just  described.  We  also  describe  in much  greater  detail  the  issue  of  endogenous  job  mobility  which  persists,  in  principle,  with worker-­‐level  analysis,  but  can  be  dealt  with  using  firm-­‐worker  match  effects  in  the  wage specification.

# **4. Worker-­‐Level   Analysis**

We  begin  our  worker-­‐level  analysis  by  considering  the  basic  specification  of  Abowd, Kramarz,  and  Margolis  (1999)  in  which  a  worker’s  wages  can  be  decomposed  as  follows:

> 34   In   unreported   results   available   upon   request,   we   provide   some   evidence   of   differential   skill upgrading   at   exporting   firms   relative   to   non-­‐exporting   firms   with   trade   liberalization.   Specifically,   we re-­‐estimate   equation   (1)   with   the   share   of   workers   with   different   levels   of   education   as   the dependent   variable.   While   a   change   in   the   ERP   has   no   significant   impact   on   the   skill   composition   of workers   in   non-­‐exporting   firms,   in   exporting   firms   a   decline   in   the   ERP   is   associated   with   an   increase in   the   share   of   college-­‐educated   workers   and   a   decrease   in   the   share   of   workers   with   less   than   high school   education.

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