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Trade and Wage Inequality: The Mediating Roles of Occupations in Germany

Internationaler Handel und Lohnungleichheit in Deutschland: Die Rolle des Berufs als Mediator

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Abstract

Recent evidence shows that rising wage inequality in industrialized countries can partially be attributed to trade integration. However, it is unclear what the mechanisms behind this relationship are. Previous explanations pointed toward the displacement of mid-wage manufacturing workers as a response to rising imports. However, for Germany it has been shown that rising exports likewise create manufacturing jobs, indicating that industry-based explanations fall short. We argue that focusing on changes of the occupational composition, as well as changes in the occupation-specific median and top wages, may help to explain the effects of trade on inequality. We draw on a task-based approach, theories of power relations between occupations, as well as self-selection by firms to arrive at predictions about the mediating role of occupations. We analyze German trade relations with China between 1994 and 2010 using social security data (BHP, IEB) and data on international trade flows (COMTRADE). Applying an instrumental variable approach, we find that, surprisingly, imports do not affect wage inequality. Instead, rising exports to China are responsible for the effects of trade integration on inequality as they increase wage dispersion within German labor market regions. Although increased trade integration alters the occupational task composition, we find no evidence that these shifts mediate the effects of exports on wage inequality. Instead, exports increase the wages of some occupations, especially for top earners, highlighting the importance of focusing on within-occupation dynamics.

Zusammenfassung

Neuere Erkenntnisse zeigen, dass sich die steigende Lohnungleichheit in industrialisierten Ländern partiell auf internationale Handelsverflechtungen zurückführen lässt. Noch ist jedoch unklar, welche Mechanismen hinter diesem Zusammenhang stehen. Bisherige Erklärungen stellen heraus, dass steigende Importe Arbeitsplätze im mittleren Lohnsegment des Produktionssektors vernichten. Für Deutschland hat sich jedoch gezeigt, dass Exporte in ähnlichem Maße neue Arbeitsplätze schaffen. Branchenbasierte Erklärungen scheinen also zu kurz zu greifen. Wir argumentieren, dass Veränderungen in der Berufsstruktur und in den berufsspezifischen Median- und Toplöhnen helfen können, den Zusammenhang zwischen Handelsbeziehungen und Lohnungleichheit zu erklären. Um Vorhersagen über die Rolle des Berufs zu treffen, greifen wir auf einen Task-Based-Approach sowie Theorien zu Machtverhältnissen zwischen Berufen und Selbstselektion von Firmen zurück. Wir analysieren die Handelsbeziehungen zwischen China und Deutschland für die Jahre 1994 bis 2010 und greifen dazu auf Sozialversicherungsdaten (Betriebs-BHP, IEB) sowie Daten zum internationalen Handelsverkehr (COMTRADE) zurück. Mithilfe von Instrumentenvariablenschätzern zeigen wir, dass Importe die Lohnungleichheit überraschenderweise nicht beeinflussen. Stattdessen sind steigende Exporte nach China für die wachsende Lohnstreuung in Arbeitsmarktregionen verantwortlich. Obwohl zunehmende Handelsverflechtungen die regionale Taskstruktur verändern, finden wir keine Anzeichen dafür, dass diese Veränderungen als Mediator für den Effekt von Exporten auf Lohnungleichheit dienen. Vielmehr scheinen Exporte die Löhne in einigen ausgewählten Berufen zu erhöhen, insbesondere für Spitzenverdiener. Die Ergebnisse unterstreichen die Bedeutung von innerberuflichen Dynamiken für die Erklärung sozialer Ungleichheit.

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Notes

  1. As Dauth et al. (2014) show, trade with Eastern Europe has risen to an even higher degree and has had a more severe impact on employment in Germany. In this study, we focus solely on China, as trade with Eastern Europe mostly depicts intra-industry trade. The theoretical predictions regarding changes in the occupational composition are thus not as clear-cut and likely differ. We thus emphasize that our results should not be generalized to all forms of trade relations.

  2. For Germany, Bartels (2019) observes that although trade exposure has not been associated with increasing inequality for most of German economic history, such an association, however, may have existed since the 1990s.

  3. The prediction for occupations marked by a mixture of routine and cognitive tasks, as well as those with mixed manual and nonroutine content is ambivalent.

  4. Data source: see the section “Data”. Wages refer to mean daily wages in 1994. Task categories refer to the tasks that are predominant in a three-digit occupation.

  5. It is important to note that, like the first mechanism, this theory relies on the assumption of imperfect labor mobility (between firms in this case), because firms pay similar workers different wages. Furthermore, note that the effects of imports in the second and third mechanisms are ambiguous, as increased competition can eliminate unproductive low-paying firms (hence raising average wages), but also decrease the capacity of the remaining relatively unproductive firms in the market to pay higher wages.

  6. Replication files can be found at malte-reichelt.com. Note that the data are only available via remote access at the Research Data Centre (FDZ) of the Federal Employment Agency at the Institute for Employment Research (IAB).

  7. Since wages are censored above the social security contributions limits, we use the differences in wages at the 85th and the 15th percentiles instead of the lowest and highest wages.

  8. While Autor et al. (2013) use a 10-year lag for employment levels, this is not a feasible choice for our analysis of the sub-period 1994–2002 owing to the German reunification in 1990, and moreover, our accessible employer–employee data start from 1988.

  9. Additionally, previous research has shown that trade shocks, when instrumented with this procedure, tend to operate largely independently of technology shocks, which could otherwise present a confounder (Autor et al. 2015).

  10. Dauth et al. (2014) also find no statistically significant effects on manufacturing employment when examining export potential to China specifically. They do, however, find export potential overall to significantly increase employment prospects.

  11. As we cannot precisely measure which occupations were truly responsible for the production of a good, we arrive at the distribution of main occupational tasks per average imported or exported product by first calculating the share each three-digit industry holds of the total imported or exported goods and then weighting these shares by the number of jobs for each occupational main task in each industry.

  12. We also estimated regressions with the median wage at the regional labor market level as the dependent variable. The results show that there is indeed no statistically significant reaction of wages to import shocks. One reason for constant wages may be that workers move occupations within the same firm, as wage cuts are relatively rare in Germany.

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Acknowledgements

We would like to thank the editors and two anonymous reviewers for their valuable comments and suggestions. We would also like to thank David Brady, Simon Janssen, Wolfgang Dauth, and the participants of the ASA 2019 sessions on Organizations, Occupations, and Work for helpful discussions and comments.

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Authors and Affiliations

  1. Social Science Division, New York University Abu Dhabi, Abu Dhabi, United Arab Emirates

    Malte Reichelt & Samreen Malik

  2. Institute for Employment Research (IAB), Nuremberg, Germany

    Malte Reichelt

  3. Trinity College Dublin, Dublin, Ireland

    Marvin Suesse

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Correspondence to Malte Reichelt.

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Reichelt, M., Malik, S. & Suesse, M. Trade and Wage Inequality: The Mediating Roles of Occupations in Germany. Köln Z Soziol 72 (Suppl 1), 535–560 (2020). https://doi.org/10.1007/s11577-020-00680-5

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