Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/271891 
Year of Publication: 
2023
Series/Report no.: 
CESifo Working Paper No. 10247
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We develop a dynamic general equilibrium framework with firm heterogeneity and monopsonistic labour markets, for quantification of the impact of trade and FDI liberalisation episodes. Firms make standard extensive margin investment choices into exporting and multinational statuses. The labour market features upward-sloping supply curves and love of variety in employment. These features interact with the variable-fixed cost tradeoff of outward activity. We calibrate the model to U.S. data and study the effect of reductions in tariffs and outward FDI taxes in both bilateral and unilateral contexts, examining steady state and transitional effects. We compare the predictions of this model with a more standard version with perfectly competitive labour markets. Our headline finding is that the model with labour market power gives substantially different quantitative estimates to the perfectly competitive version. For instance, a bilateral trade liberalisation gives welfare gains that are over 10 times larger in the presence of monopsony power. Significant quantitative differences persist with a variety of robustness exercises.
Subjects: 
monopsonistic labour market
trade liberalisation
love of firm variety
dynamics
foreign direct investment
corporate taxation
JEL: 
F12
F13
F16
F23
F40
H25
Document Type: 
Working Paper
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