Trade Liberalization and Labor Market Monopsony Power: Evidence From China

ABSTRACT We study the effect of trade liberalization on firms' monopsony power in the labor market. We estimate firm‐specific markdowns from production data in the manufacturing industry and document the trends in China between 1998 and 2007. Taking China's entry to the WTO as a policy shock, we use a difference‐in‐differences (DiD) approach combined with an instrumental variable (IV) strategy to show that a one percentage point decrease in input tariff reduces markdown by 1.9%–2.2%. Moreover, we explain the pattern by constructing shift‐share trade shocks and find that the number of firms increases in regions more exposed to export expansion, and decreases in regions more exposed to import competition, while the net positive effect on firm number is associated with lower monopsony power. The results highlight the opposing impacts of import and export shocks and regional heterogeneity across labor markets.