DP1818 | Product Market Integration and Wages: Evidence from a Cross-Section of Manufacturing Establishments in the United Kingdom

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Theory predicts that when economies become more integrated through the removal of tariff and other barriers to trade, resulting in an increase in competition in product markets, there should be effects on wage and employment outcomes in labour markets, particularly those in which unions are active. We investigate this idea empirically using a cross-section of UK manufacturing establishments from the 1990 WIRS data set. A reduction in non-tariff barriers from high to medium leads to lower wages, particularly for unskilled workers. Further reductions in non-tariff barriers produce a less well-determined effect. Intra-industry trade flows relative to sales, which are also used as a proxy for international integration, do not appear to affect wages so markedly.