Wages, prices, and international trade: Trends across industries for an "export champion"

The recent economic policy debate in Germany emphasizes the impact of globalization of the world economy on the German labor market. This paper provides an empirical analysis of the relationship between trade and the labor market in West Germany for the period from 1970 until German reunification in 1990. Building on the emphasis of trade theory on relative output prices as the major transmission channel of trade effects on the labor market, the empirical analysis first develops a series of empirical regularities characterizing trends in trade, total factor productivity growth, and labor markets. Then building on Learner (1996), a more structural analysis identifies empirically the qualitative effects of trade and total factor productivity growth. The analysis allows for three skill types of labor. The major empirical findings are that, relative to skilled labor, wages were increasing disproportionately both for low- and highskilled labor whereas employment trends were favoring higher skill levels monotonically. Import competition as well as total factor productivity were increasing disproportionately in those industries using low- or high-skilled labor-intensively. These results are consistent with trade effects dominating for low-skilled labor and technology effects for high-skilled labor. At the same time, the wage bargaining institutions were holding up relative wages of low-skilled labor which accounts for the disproportionate increase of unemployment for this group. The empirical analysis merges national account data for 49 industries with the "IAB-Beschaftigtenstichprobe", a 1% random sample from German social security accounts, which has become available only recently.