Title: Can Freer Intra-Industry Trade Raise Wages? Evidence from Canada
Reference Number: 1073
Publication Date: September 2003

K.C. Fung
University of California Santa Cruz; Hong Kong Institute of Economics and Business Strategy

Harry Huizinga
Tilburg University

Will the formation of free trade areas lead to lower wages? Much of the literature on linking globalization and the labour market suggest that increased openness can lead to lower wages. In this paper we investigate empirically the case of Canada, which signed a free trade agreement with the United States in 1988. A significant portion of trade between the United States and Canada is intra-industry in character. In Krugman's (1981, 1982) monopolistically competitive intra-industry model, trade liberalization actually has an ambiguous impact on wages. Based on Krugman's model, we provide an empirical study relating Canadian wages to workers' characteristics, industry characteristics, and tariff and non-tariff barriers. Among other findings, we show that freer intra-industry trade can raise workers' wages. This result persists even after the endogeneity of trade barriers is taken into account.

Last modified: 10/06/2003