Labor market institutions, firm-specific skills, and trade patterns

This paper studies how a country's labor market institutions, by affecting workers' skill acquisition, can shape its export patterns. I develop an open-economy model in which workers undertake non-contractible activities to acquire firm-specific skills on the job. In the model, labor market protection raises workers' incentives to acquire firm-specific skills relative to general skills, turning labor laws into a source of comparative advantage. In particular, the model shows that countries with more protective labor laws export relatively more in firm-specific skill-intensive sectors at both the intensive and extensive margins. To test the theoretical predictions. I construct sector proxies for the firm-specific and industry-specific skill intensity by estimating returns to firm tenure and industry tenure for different U.S. manufacturing sectors during the 1974-1993 period. By estimating sector-level gravity equations for 84 countries using the Helpman-Melitz-Rubinstein (2008) framework, I find evidence supporting the predicted effects of labor market institutions at both margins of exports. (C) 2012 Elsevier B.V. All rights reserved.