Intra-industry Trade Exposure, Fragmentation, and Labor Adjustment

Abstract

Over the last two decades, labor market prospects of the low skilled in OECDcountries deteriorated sharply. Developments like these have been frequently traced back to low-cost competition from abroad. Yet, the Heckscher-Ohlin hypothesis is hard to reconcile with the fact that OECD-trade is for the most (and growing) part intraindustry trade (IIT). IIT is usually regarded as much less disruptive as it is considered to affect the regional composition of product demand, but not necessarily labor demand. The paper proposes a model of trade-induced technology choice in which, contrary to many beliefs, IIT generates substantial shifts in labor demand and employment. These changes are due to technology implementation being associated with spill-over effects related to business services and production fragmentation within and across firms. The model can account for a number of stylized facts of OECD-labor markets, including the bimodal growth of high and low-skilled services employment, and the recent concentration of demand for skill in management and business-service occupations, and is in line with statistics based on input-output tables suggesting that production methods changed in tandem with exposure to foreign competition.