How Wages and Employment Adjust to Trade Liberalization

We study the responses of regional employment and nominal wages to trade liberalization, exploiting the natural experiment provided by the opening of Central and Eastern European markets after the fall of the Iron Curtain in 1990. Using data for Austrian municipalities, we examine differential pre- and post-1990 wage and employment growth rates between regions bordering the formerly communist economies and interior regions. If the ‘border regions’ are de…ned narrowly, within a band of less than 50 kilometers, we can identify statistically signifcant liberalization effects on both employment and wages. While wage responses preceded employment responses, the employment effect over the entire adjustment period is estimated to be three times as large as the wage effect. The implied slope of the regional labor supply curve can be replicated in a new economic geography model that features obstacles to labor migration due to immobile housing and to heterogeneous locational preferences.