TRADE AND TOWNS: DOES TRADE LIBERALISATION HURT THE ...

Trade and Towns: Does Trade Liberalisation Hurt the Countryside?Brülhart, Carrère & Robert-Nicoud

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TRADE AND TOWNS:DOES TRADE LIBERALISATION HURT

THE COUNTRYSIDE?

Marius BrülhartUniversity of Lausanne and CEPR

Céline CarrèreUniversity of Geneva

Frédéric Robert-NicoudUniversity of Geneva

ETSG, Copenhagen, 9 September 2011


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MOTIVATION (1)

Intranational effects of international trade on:○ industries: Ricardo, Heckscher-Ohlin,...○ factors: Heckscher-Ohlin, Stolper-Samuelson,...○ firms: “new” and “new new” trade theories○ places: relatively underresearched

Questions:○ How does trade liberalisation impact on intranational

economic geographies?○ Are large regions/cities/towns affected differently

relative to small ones?


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MOTIVATION (2)

“The openness to trade and capital flow that makesmarkets more global also makes subnational disparities inincome larger and persist for longer [...]. Not all parts of acountry are suited for accessing world markets, andcoastal and economically dense places do better.”

World Bank, World Development Report 2009

Common perception among policy makers that tradeliberalization is more beneficial to cities than to ruralregions

Two dimensions: size/density, and proximity to foreignmarkets

We consider the size dimension, by exploring theimpact of an equal-sized trade shock on large andsmall towns


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PRIOR RESEARCH (1)

Regional effects of international trade: Theory

o “urban systems” models (Henderson, RSUE 1982):trade raises employment and wages in places thatspecialise in comparative-advantage good could cut either way for large/small towns

o “new economic geography”: trade raises employmentand wages in small region (Krugman & Livas, JDE1996) or in large region (Monfort & Nicolini, JUE 2000) could cut either way for large/small towns


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PRIOR RESEARCH (2)

Regional effects of international trade: Empirics

o Ades & Glaeser (QJE 1995), Henderson (JEGr 2003):cross-country panels trade reduces urban primacy

o Redding & Sturm (AER 2008): quasi-experimentalapproach trade disproportionally favours growth ofsmaller cities

points towards a spatially equalising effect of trade common perception among policy makers

Limitations

o Cross-country panels do not allow causal inferenceo Existing studies only look at quantity effects

(population)


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OUR APPROACH

Two-factor model of spatial wage and employmentadjustment to changes in external market access

Austria before/after the fall of the Iron Curtain in 1990as a natural experiment: border regions as treatmentgroup and interior regions as control group (Brülhart,Carrère & Trionfetti, JIE forthc.)

Estimate trade-induced employment changes andwage changes as a function of municipality size


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THE MODEL (1)

Multi-location economy with○ 2 factors: immobile workers H, mobile workers L○ constant returns to scale, identical C-D production

functions across locations j (“towns”)○ different producer prices across towns, pj, due to

differences in market access equilibrium town size (j Hj Lj) increases in Hj and

in pj

larger towns have a smaller share of mobile workers average wages, j, differ across towns

Trade liberalisation modelled as an increase in pj for all jinside a “border region”


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THE MODEL (2)

Trade liberalisation...○ ...increases size, j, as well as average wages, j, for

all affected towns○ ...increases j relatively more for small towns○ ...increases j relatively more for large towns Large towns have less elastic local labour supply than

small towns

This result is unchanged if we make the model more“urban” by adding non-traded endowments (housing)and/or town-level agglomeration economies that areexternal to firms


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EMPIRICAL SETTING: THE TREATMENTmerchandise imports + exports as share of total Austrian trade,1990 = 100

Czech/Slovak Rep.

Hungary

(former) Yugoslavia

Switzerland

Germany (East+West)

Italy

70

100

130

160

190

220

250

280

310

340

1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006


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A4

A6

A8

A25

A9

A1

A7

E56

E55

A22

A23

E59

E60

B 303

S33

A21

A2

A3

S31

S1

E58

S4

S6

A9

E59

A2

S36

A10

A11

E55

Slovenia

Hungary

Slovakia

Czech Republic

≤ 50≤ 25

Distance in kilometres

EMPIRICALSETTING:TREATMENTAND CONTROLGROUPS


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REGRESSION SPECIFICATIONS

Cumulative treatment effects on wage and employmentgrowth:

jt j t j tWage Size Fall Border Fall1 2

wagej j t j t jtBorder Size Fall d d3

jt j t j tEmpl Size Fall Border Fall1 2

emplj j t j t jtBorder Size Fall d d3

OLS with municipality-level error clustering Robustness to different definitions of treatment and

control groups


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DATA

Austrian Social Security Database: nominal wage andworkplace municipality of all Austrians in private-sectoremployment, quarterly 1975-2002 (>280 million records)o Size computed as municipal private-sector employment

in Q1 1989 in functional urban areas (Stadtregionen) 2,047 “towns”

o Wage computed as town-quarter median across maleworkers

Treatment towns defined as lying within...o 25 road kilometres of nearest border post (Border25),

oro 40/60 road kilometres of nearest Eastern city with

50,000 inhabitants (Border40, Border60)


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ΔWage ΔEmpl ΔWage ΔEmpl ΔWage ΔEmpl(1) (2) (3) (4) (3) (4)

Size x Fall 0.014** 0.002 0.015** -0.003 0.014** -0.0003(0.006) (0.006) (0.007) (0.007) (0.006) (0.006)

Border25 x Fall 0.232* 0.929***(0.128) (0.295)

Border40 x Fall 0.206 1.685**(0.261) (0.677)

Border60 x Fall 0.133 0.696**(0.139) (0.318)

Border25 x Size x Fall 0.181** -0.424***(0.082) (0.106)

Border40 x Size x Fall 6.350* -22.60*(3.780) (11.500)

Border60 x Size x Fall 0.136** -0.318***(0.060) (0.107)

No. obs. 218,505 218,505 218,505 218,505 218,505 218,505No. towns 2,047 2,047 2,047 2,047 2,047 2,047R² 0.059 0.185 0.059 0.185 0.059 0.185quarter fixed effects Yes Yes Yes Yes Yes Yesmunicipality fixed effects Yes Yes Yes Yes Yes Yes

Dependent variable:

Note: estimation with OLS; standard errors in parentheses: clustered by municipality; * : p=0.1, **: p=0.05,***: p=0.01

annual growth rate, quarter by quarter

BASELINE RESULTS


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CONCLUSIONS

Trade liberalisation boosts employment and nominalwages in border regions, both in small and large towns

Employment effect stronger in smaller towns, wage effectstronger in larger towns

larger towns have less elastic labour supply consistent with our model

Why?o industry composition?o skill composition?

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