Imports and Domestic Wages: Is the Relationship Consistent with Expense Preference Behavior?

Abstract

The relatively recent emergence of strong import competition has dramatically altered the employment relationship in a wide variety of industries. While previous analysis of imports has frequently been limited to effects on employment levels, it is inappropriate to presume that other job conditions remain unchanged. This study joins a growing number that examine the association between domestic wage levels and the degree of import penetration. As such, it can be considered part of a larger literature examining the influence of product-market structure on wages. Unfortunately, this literature is largely bereft of satisfactory theoretical underpinnings and has not convincingly explained why more monopolistic firms pay higher wages for otherwise equal workers. My agenda is threefold. First, I will present a theory for the association between market structure and wages that integrates two disparate literatures: expense preference behavior and notions of an efficiency wage. Second, I will demonstrate that import penetration (as one element of market structure) behaves roughly as predicted and in tandem with other elements of market structure. Third, I will suggest, and to the extent possible test, other rationales