Katrine V. Løken, NHH

The Effect of Labor Market Competition on Firms, Workers, and Communities

Abstract

This paper isolates the impact of labor market competition on firms, workers, and local communities. A shock to labor mobility from Sweden to Norway caused a substantial increase in labor competition for Swedish firms on the border with Norway. Using unique register data linked across the two countries, we show that Swedish firms respond to the increased competition by raising wages and reducing their workforces. The retained workers are of lower quality, resulting in a drop in value added per worker and an increasing probability of market exit. The negative effects on firms spill over to the communities, which experience population flight, declining business activity, increased inequality, and increased support for traditional worker protection parties. Norwegian firms benefit through cheaper labor costs. There is some suggestive evidence of Norwegian workers being displaced.
In addition, high-skilled Norwegian laborers lose their skill monopoly, generating wage compression at the top of the income distribution and an improvement in wage equality. The communities see increased support for anti-integration parties.
We conclude that large shocks to labor market competition, while benefiting certain workers, may have detrimental effects on local communities due to adverse effects on firm survival and local business activity.

Katrine V. Løken is Professor of Economics at the Norwegian School of Economics. Her PhD is from University of Bergen in 2010. She is co-research director at CELE since 2017, and a Principal Investigator at the Centre of Excellence FAIR (Centre for Experimental Research on Fairness, Inequality and Rationality).

Løken is a research fellow at CEPR, IZE and CES-ifo and Professor II at University of Bergen and Statistics Norway. She is on the board of editors at The Review of Economic Studies.

Her main research interests are in early investments in children, and the long-term outcomes and effects of different social policies. She has focused on identifying causal effects of policies such as parental leave, subsidized day care, father’s quota in leave, and cash subsidies for families.

Her work combines state-of-the art statistical analysis with access to uniquely detailed Norwegian register data. More recently, she has started a new project looking at the causal effect of incarceration. With the aim of pushing the research frontier in the economics of crime, Løken has acquired access to unique datasets on criminals and victims.

Løken’s work has been published in leading economic journals, including American Economic Review, Journal of Political Economy, Review of Economics and Statistics, Journal of Public Economics and American Economic Journal: Applied Economics. Her work has been widely disseminated in international media, including for example The Atlantic, Freakonomics Blog, and Harvard Business Review. She is currently Op-ed columnist at Dagens Næringsliv.

She was awarded the Nils Klim Prize in 2017, a price given annually to a young Nordic scholar within law, humanities and social sciences.

Løken is the Principal Investigator for the project Social Costs of Incarceration, funded by the Norwegian Research Council from 2015-2018.

You can read more about Katrine V. Løken here

CEBI contact: Claus T. Kreiner