The impact of WTO accession on Chinese firms' product and labor market power

This paper examines the impact of WTO membership on the extensive and intensive margins of product and labor market power of Chinese manufacturing firms during the period 1999- 2006. We first identify a firm's regime of competitiveness, corresponding to a combination of a product market setting and a labor market setting, at any point in time through implementing the testing procedure of Kodde and Palm (1986), the distance test. Our descriptive differencesin-differences analysis shows that an industry's dominant regime of competitiveness is stable over time. Exploiting variation in input and output tariff reductions after WTO accession across industries, we then show that on the extensive margin, reducing tariffs on intermediate inputs decreases the likelihood of shifting firms away from an imperfectly competitive labor market setting where the marginal employee is paid a real wage either above or below her marginal product (i.e. wage markup or markdown). In contrast, falling tariffs on final goods increases the likelihood of switching firms away from setting wage markdowns. On the intensive margin, trade liberalization via input tariff reductions is found to increase a firm's price-cost markup but to decrease the degree of wage-setting power that a firm possesses. Such joint responses of firms' pricing behavior to trade policy changes are important for understanding increased inter-firm wage disparities.