Essays On Trade And Productivity

Abstract

This dissertation consists of two chapters. The first chapter extends economic theory and empirical methods to examine firm outsourcing decisions. Empirical models of production often impose input complementarity and rule out an extensive margin in the decision to "make or buy" inputs. This paper develops a simple model of production which generalizes the standard Cobb-Douglas approach and allows labor and intermediates of similar types (or "tasks") to be complements, substitutes, or (importantly) outsourced entirely. Modeling this make-or-buy decision directly allows me to correct for the selection bias resulting from the endogenous outsourcing decision and to characterize the extensive margin of factor demand. I take the model to unique Danish data on task-level purchases of disaggregated labor (e.g., truck drivers), goods, and services (e.g., shipping) and find that labor and intermediates are gross substitutes. Estimated elasticities of substitution range from 1.5 to 4, with positive cross-price elasticities between 0 to 2 across inputs and industries. These results also hold in standard firm data using total labor and intermediate expenditure variables. Aggregating across firms, I show that demand for labor is becoming increasingly price elastic over time, driven by growing outsourcing and specialization. To illustrate the importance of allowing for flexible substitutability, I examine the effect of an increase in minimum wages in the Danish manufacturing industry, finding that ignoring outsourcing underestimates disemployment by 40%. This finding also has important implications for estimating productivity. I estimate the effect of recent decreases in Danish import tariffs on firm productivity and show that controlling for substitution triples the results relative to benchmark models which only control for price effects. In the second chapter, my coauthor, Ming Xu, and I investigate how trade costs and firm make-or-buy decisions have an impact on the aggregate wage distribution. Firms react to changes in factor prices with intensive and extensive-margin employment adjustments at the occupational-level. We study the distributional and aggregate consequences of this make-or-buy dynamic by developing a novel network model of heterogeneous firm-to-firm trade where the boundary of each firm depends on factor prices and firm-occupation comparative advantage in input-production. We show that the model can be easily aggregated and taken to industry-level data, and use the calibrated model to examine recent trends in employment, wages and trade in the USA. We use public OES and CPS data to show empirical evidence that a significant fraction of the growth in wage inequality in the USA is due to changes in firm/industry specialization and occupation sorting. To understand and measure the underlying causes of these trends, we calibrate the model to occupation and industry data from the OES and input-output tables. The results suggest that 1/3rd of the increases in wage inequality stem from decreases in inter-industry trade frictions with the remaining 2/3rds stemming from changes in technology and labor supply. Falling trade frictions are also responsible for all of the increases in occupational sorting and concentration. Had trade frictions been held at their 2002 level, productivity growth would have led to an increase in vertical integration, rather than the decrease observed in the data.