Trade Liberalization, Firm Heterogeneity, and Labor Layoffs: An Empirical Investigation
This is the first empirical attempt to provide evidence for the interaction between firm-level total factor productivity and trade liberalization as key determinants of firm-level job destruction caused by trade. Employing an original US firm-level data, we test and find support for theoretical predictions from Melitz (2003), whose model we use to derive an explicit equation relating firm productivity and trade-induced layoffs when a country liberalizes its trade policy. In addition, we incorporate intuitive labor market interactions that are not explicitly captured in Melitz's model. These allow us to reconcile some discrepancies between theory and empirical work.