No risk and some fun? Trade and wages in the enlarged European Union

Abstract

This paper analyses the relationship between openness to trade and wages at the industry level (15 manufacturing and 6 service industries) in 25 EU countries over the period from 1995 to 2005. By applying a cross-country and industry-specific approach, it is possible to control for unobserved heterogeneity at both country and industry levels. We also differentiate between intra and inter-industry trade and we try to assess the relative importance of foreign wages versus domestic productivity developments in an open environment. We find that trade is not an important driver of wages, since the wage response to trade is small. Moreover, in line with the Stolper-Samuelson reasoning, the overall wage impact is always positive if significant in central and eastern Europe, while in western Europe we often observe a negative response, particularly in resource-based industries. Nevertheless, increased trade reinforces the productivity-wage link and weakens the co-movement of wages in eastern Europe, while there is less evidence of a similar wage-disciplining effect of trade in the west.