Trade Liberalization, Labor Market Power, and Misallocation Across Firms : Quantitative Evidence from China's WTO Accession

We study the effect of heterogeneous monopsony power across Chinese firms on the equilibrium allocation of labor. Based on the fact that heterogeneity in monopsony power results from the heterogeneity in workers’ preferences for the jobs provided by an individual firm, we build a model to derive that the variance in logarithmic markdown serves as sufficient statistics that can be used to infer the impact of heterogeneous monopsony power on overall production efficiency at the national level. We further quantify the welfare effect associated with labor reallocation after China joined the WTO in 2001. The empirical results suggest that lower input tariffs decrease the level of misallocation in the labor market, which is captured by the decreased variance in logarithmic markdown. In contrast, reductions in output tariffs have no significant effect. Overall, the improved allocation of labor accounts for 5% of the total production efficiency gains from China’s trade liberalization