The Loss of Production Work: Identification of Demand Shifts Based on Local Soviet Trade Shocks

Abstract

This paper examines changes in the structure of labor demand in panel data on Finnish manufacturing plants. I exploit general equilibrium effects on unit labor costs in local labor markets induced by the 1990 collapse of Fenno-Soviet trade to identify labor demand schedules for plants producing for the non-Soviet markets, which were not directly affected by the fall of Soviet-import demand. The estimated model implies that the relative demand for noninterpersonal, manual task-intensive production labor activities is stagnant in the 1990s, but starts to decline rapidly in the early 2000s, coinciding with a surge of imported intermediate inputs. In this period, the industry patterns of the shift also begin to diverge. Offshoring and ICT explain both one-third of the overall shift.