o Technology, Trade and the Microeconomics of Structural Change – ARFT

Advanced economies have experienced rapid structural change over the last few decades, which is manifested in several dimensions. We propose studying the causes of changes in the structure of employment and in the wage distribution in France in 1994-2012, through the lens of the firm.

Our proposal has two main parts. The first studies broad aspects of structural change and its effect on the distribution of labor income. We start with studying the evolution of the labor share in national income. While the aggregate labor share appears relatively stable in France, changes in the composition of firms which use different labor intensities mechanically affect the distribution of income across workers. We then turn to studying job polarization (the hollowing of the middle class), and how technological change, exporting and offshoring shape it through the firms they affect the most.

The second part of the proposal studies in more detail the roles of globalization, labor market regulation and labor market dynamics on structural change and income distribution through specific firm level mechanisms. First, we study the role of cross-border mergers and acquisitions on wages in targeted firms in France (a large share of total employment). Then we study the effect of dual labor markets on firm productivity and, therefore, the structure of employment. Finally, we study how changes in labor sorting across firms and rent sharing within firms affect the overall wage distribution.

Our proposal is innovative in several ways, and has three defining features: (1) use of comprehensive administrative data, (2) focus on firm level analysis, and (3) causal inference. We rely on a set of administrative datasets that allow linking workers with technology, exporting, offshoring, cross-border mergers and acquisitions, and labor market regulations – all through the firm at which they work.

Since most economic activity in advanced economies is organized within and between firms, changes in types of firms, their internal organization and in the distribution of firms over time are important factors that drive structural change and changes in the wage distribution. Therefore, the firm level analysis lends itself to identifying the causal mechanisms of adjustment; overlooking the firm dimension can be misleading. This approach allows distinguishing among competing theories about the determinants of structural change and how it affects the distribution of income. To make causal inferences we employ advanced micro-econometric techniques to firm level analysis and innovative identification strategies of causal effects. While our focus is on demand side mechanisms, we acknowledge the importance of supply shifts and take them into account in the analysis.

Our project has important policy implications that are highlighted through our firm-level approach. By examining structural shifts through a micro-economic lens, we can better assess which firms are more likely to affect the overall patterns of employment and wages. Inasmuch as there is a concern for, e.g., the hollowing of the middle class and top percentile wage inequality, targeting these firms may be more effective than blanket policies in mitigating the underlying demand-side driving factors, while keeping the costs of labor market regulation low. We will also evaluate in particular how changes in regulation of employment flexibility may affect firm productivity, firm competitiveness, and the distribution of income through these specific channels. All this is enabled by using detailed matched firm-worker datasets over a long period, and careful firm-level micro analysis.