infonet-economy

Trade liberalization is often believed to benefit urbanized regions more than rural regions. We explore the effects of trade liberalization on employment and wage growth of different sized towns within a country. A multi-region model of intranational adjustment predicts that small towns have more elastic labor-force responses to trade liberalization. We examine this predictions in finegrained regional data for Austria. The fall of the Iron Curtain in 1990 represented a large exogenous trade shock to the Austrian economy, providing us with a quasi-experimental setting for the exploration of trade-induced spatial effects. We find improved access to foreign markets to boost both employment and nominal wages, but large towns tended to have larger wage responses and smaller employment responses than small towns. In terms of aggregate income responses, the two effects cancel out: we find no statistically significant differences in the effects of trade liberalization on the wage bills of small and large towns.