Trade liberalization and labor monopsony: Evidence from Chinese firms

We document that larger input tariff reductions were associated with lower labor markdowns in China, especially for skill-intensive firms. Guided by a stylized model of equilibrium labor market power, we leverage differences in the aggregate labor supply dynamics across labor markets – such as regional variations in China’s contemporaneous college expansion reforms – to that show trade-induced labor markdown decreased more in labor markets with more labor supply growth. Our estimates suggest that lower labor markdowns due to input trade liberalization offset China’s aggregate labor share decline by almost one-half percentage point in the early 2000s. •Labor markdowns fell more in labor markets exposed to larger input tariff declines.•Labor markdowns fell more/less pronounced for more/less skill-intensive firms.•Labor markdowns fell more in regions with large contemporaneous college expansions.•Lower labor markdowns modestly offset China’s aggregate labor share decline.