Trade costs in services: Firm survival, firm growth and implied changes in employment

Abstract

This paper analyzes the impact of industry-level trade cost changes on job creation and job destruction in Austrian service firms. The empirical analysis builds on heterogeneous firm trade models and their predictions on labor demand. Using a unique firm-level employer-employee matched dataset, we are able to account for all adjustment margins. We estimate a two-part model of firm survival and firm growth in terms of employment. Notably, these are complemented by separate regressions for firm entry rates at the industry-region level. To measure the change in trade costs in the services sector, we implement the measure of indirect trade cost introduced by Chen and Novy (2011). The estimates suggest that falling trade costs led to a net job creation of about 35.000 jobs in the Austrian service sector, accounting for 17.6 percent of the jobs created over the period 2000 to 2014. Smaller (less productive) firms contracted, while large (more productive) firms expanded, as predicted by theory. A large part of the adjustment occurred at the extensive margin due to changes in the probability of firm survival.