International Trade Responses to Labor Market Regulations
American Economic Review · 2025 · Volume 115 · Issue 11
Abstract
This paper demonstrates that labor market regulations, such as minimum wages or payroll taxes, shape trade competition in labor-intensive activities. I exploit data from a large European trade program where firms from different countries supply labor services at the same location but face different payroll taxes and minimum wage rules. Country case studies and model-consistent gravity estimates show large trade responses to tax and regulatory reforms, with an elasticity of trade in services to labor costs larger than one. The results imply that absent regulatory and fiscal harmonization, export competitiveness depends, in part, on domestic labor market policies.
Keywords
Empirical Studies of Trade, Trade and Labor Market Interactions, International Policy Coordination and Transmission, Business Taxes and Subsidies including sales and value-added (VAT), Time Allocation and Labor Supply, Labor Demand, Labor Law
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