Does It Matter What We Trade? Trade and Industrial Policies When Labor Markets Don't Clear
William T. Dickens
In efficiency wage models firms set employment so that the
value of the marginal revenue product of labor (VMRPL) equals the
wage. If the payment of efficiency wages results in inter-industry
wage differences for comparable workers there exist welfare
enhancing industrial and trade policies which shift employment from
low to high wage industries. Previous attempts to measure the
potential impact of such policies have assumed that wages equal the
VMRPL, but not all explanations for inter-industry wage differences
have that property.
This paper argues, from the evidence on inter-industry wage
differences that rent-sharing/extraction models should be preferred
to other explanations. However, such models do not all have the
property that wages equal the VMRPL. In the model presented VNRPL
is set equal to the opportunity cost of labor so policies to shift
employment to high wage industries would be of no value. Further,
the empirical work that has been done to assess the importance of
labor market distortions for trade and industrial policy is
inapplicable if such models are the correct explanation for interindustry
A rent-extraction model that takes into account workers'
limited information about the profitability of the company they
work for is developed. In that model high wage industries have
high VPL so policies to shift employment to high wage industries
are appropriate and past empirical studies of the effects of trade
and industrial policy are approximately correct.
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