IMPORT COMPETITION AND WAGES - THE ROLE OF THE NONTRADABLE GOODS SECTOR

Several investigators have studied the role of import competition in e xplaining wage behavior, with apparently conflicting results: Some hav e found a significant effect of import competition on wages in manufac turing, while others have found no such effect in the aggregate. This paper highlights the role of the nontradable goods sector-not addresse d in previous studies-to reconcile these results. The model demonstrat es that a fall in the relative price of tradable goods has an ambiguou s effect on aggregate real wages: while the lower price of tradable go ods leads to lower labor demand in the tradable sector, it also leads to higher labor demand in the nontradable sector. Empirical results sh ow considerable support for the model when tradable goods prices are m easured by import or export prices, but not when they are measured by the real exchange rate.