Threat Effects and Trade: Wage Discipline Through Product Market Competition

Dube, Arindrajit; Reddy, Sanjay G.

doi:10.2139/ssrn.935969

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Threat Effects and Trade: Wage Discipline Through Product Market Competition

42 Pages Posted: 9 Oct 2006

See all articles by Arindrajit Dube

Arindrajit Dube

University of California, Berkeley - Institute for Research on Labor and Employment; University of California, Berkeley - Institute for Research on Labor and Employment

Sanjay G. Reddy

The New School - Department of Economics

Date Written: October 8, 2006

Abstract

We present a formal model of the effect of heightened product market competition induced by trade liberalization on the distribution of income between profits and wages. Integration increases the employment cost of wage demands, thereby decreasing bargained wages and the share of rents accruing to workers. This effect is amplified because of the existence of strategic complementarities which bring about a race to the bottom. Trade-liberalization induced wage discipline mitigates the impact of increased competition on firm rents, and may even raise profits.

Keywords: Trade, Bargaining, Rent-Sharing, Income Distribution,Threat Effects

JEL Classification: F12,F15,F16, D31, D33, J3, J5

Suggested Citation: Suggested Citation

Dube, Arindrajit and Dube, Arindrajit and Reddy, Sanjay G., Threat Effects and Trade: Wage Discipline Through Product Market Competition (October 8, 2006). Available at SSRN: https://ssrn.com/abstract=935969 or http://dx.doi.org/10.2139/ssrn.935969