factors either directly through foreign affiliates or indirectly through intermediate inputs. As a con-
sequence, trade and investment liberalization expand the set of factors an industry can substitute
towards in response to higher domestic wages, thus increasing e.
To summarize, trade and investment liberalization can potentially increase the labor demand
elasticity either by increasing the product-market demand elasticity or by increasing the elasticity
of substitution between labor and all other production factors. Next, we turn to the empirical
evidence to see whether trade liberalization actually increased labor demand elasticities.
6.1 Evidence on patterns in labor demand elasticities
6.1.1 Industry-level evidence
The first rigorous attempt to estimate the impact of international trade on labor demand elasticities
is provided by Slaughter (2001). He uses the NBER Productivity Data Base to estimate time series
of labor demand elasticities from 1961 to 1991 for production and non-production workers for U.S.
manufacturing overall and for eight manufacturing industries. The estimated elasticities are then
regressed on several trade measures to see whether patterns in trade can explain the estimated
patterns in the labor demand elasticities.
The main trade measures used by Slaughter include exports, imports or net exports as a share
of shipments, measures of trends in transport costs (e.g., the ratio of c.i.f. import value to customs
import value), measures of outsourcing (e.g., the share of imported intermediates), multinational
measures (e.g., foreign affiliate share of U.S. multinationals’ total employment), et cetera.
The main findings of Slaughter can be summarized as follows. In the period of analysis, the
demand elasticity for production labor has increased in manufacturing overall and in most manu-
facturing industries (in particular, it has almost doubled since the mid-1970s). On the other hand,
there is no sign of an increase over time in the demand elasticity for non-production labor (indeed,
this elasticity has fallen in the last decades).
As far as the effect of trade on production labor is concerned, Slaughter finds that most of his
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