Extensive and Intensive Margins of Exports and Labor Heterogeneity

• Published date: 01 February 2016
• Author: Tuan Anh Luong,Wei‐Chih Chen
• Date: 01 February 2016
• DOI: http://doi.org/10.1111/rode.12199

Extensive and Intensive Margins of Exports and

Labor Heterogeneity

Tuan Anh Luong and Wei-Chih Chen*

Abstract

This paper investigates how changes in skilled and unskilled labor supply affect different margins of

exports. Using bilateral trade data in manufacturing sectors of 34 countries from 1995 to 2010, we find that

most of the impact of skilled labor on exports goes through the intensive margin, whereas most of the effect

of unskilled labor works through the extensive margin. These outcomes result from the impact of labor skill

composition on the productivity cut-off of exporters. We also find that the impact of skilled and unskilled

labor on trade margins depends on the income level of countries and on the type of products. The results

indicate that the effect of skilled labor is greater for low-income countries and differentiated products,

while that of unskilled labor is greater for high-income countries and homogeneous products.

1. Introduction

The recent availability of micro data has allowed economists to investigate the exten-

sive and intensive margins of trade, which have different welfare implications for

export growth. An increase in the intensive margin means that the country exports a

greater volume of each product, which may worsen the terms of trade and decrease

the exporter’s welfare. In contrast, a rise in the extensive margin can improve welfare

by increasing the market share of the exporter and diversifying exports against trade

shocks. Despite the need to differentiate the two margins, the literature yields mixed

results as to which margin is the more important venue for trade growth. In some

studies, the extensive margin is reported to play a more important role (Hummels and

Klenow, 2005); while in others, the main venue is the intensive margin (Felbermayr

and Kohler, 2006; Eaton et al., 2008; Helpman et al., 2008).

The discussion of the extensive and intensive margins of trade started to receive

increased attention after the arrival of the “new” new trade theories, in particular the

seminal work by Melitz (2003). We provide a new mechanism that affects the two

margins of trade, based on a model in Luong (2014). By including different types of

labor (skilled vs unskilled labor) in the model, he shows that in addition to the within-

firm effect (i.e. more managers/skilled labor implies more varieties supplied; more

workers/unskilled labor produce greater quantity per product line), the change of

labor composition also induces a between-firm effect that leads to firms’ entry to/exit

from the export market. This new effect is a result of the multiple-product feature

that is now the subject of a growing literature (Bernard et al., 2010, 2011). Putting

* Chen: Shanghai University of Finance and Economics, Shanghai 200433, China

Tel:+86-21-6590-7841;

Fax: +86-21-6590-7458; E-mail: wei.chihchen@shufe.edu.cn. Luong: Shanghai University of Finance and

Economics, Shanghai 200433 China. The authors thank participants at Shanghai University of Finance and

Economics, the Asia Pacific Trade seminars, the IEFS, MidWest Trade Conference, the City University of

Hong Kong Applied Microeconomics Workshop for helpful comments and Ye Hong, Jiang Su and Can

Dan for research assistance. All the remaining errors are those of the authors.

Review of Development Economics, 20(1), 201–213, 2016

DOI:10.1111/rode.12199

©2015 John Wiley & Sons Ltd

; Department of Economics,

NationalChung Cheng University, 168UniversityRoad, Min-Hsiung,Chiayi, 62102,Taiwan.