Abstract

This paper studies how trade liberalization affects firms’ skill demand and workforce composition using panel data on Vietnamese manufacturing small and medium enterprises over the period 20032014. We exploit the sharp and externally driven reductions in output and input tariffs associated with Vietnam’s accession to the World Trade Organization as a source of quasi-experimental variation in trade exposure. Distinguishing between output and input tariff reductions, we show that these two channels of trade liberalization have statistically significant and opposite effects on firms’ workforce composition. Output tariff cuts reduce the skill ratio, consistent with specialization in labor-intensive activities, although the associated employment effects are weaker and less precisely estimated. By contrast, input tariff reductions induce an absolute skill-biased adjustment, increasing skilled employment and reducing unskilled labor. At the occupational level, input liberalization increases managerial employment and reduces production jobs, pointing to organizational changes within firms. Output liberalization is associated with a decline in managerial employment, although these estimates are less precisely estimated. These findings contribute to the literature by providing robust evidence on the distinct roles of output and input tariff reductions and by documenting how trade liberalization reshapes workforce composition across both skill groups and occupations within firms. From a policy perspective, the results highlight the importance of access to foreign inputs in fostering workforce upgrading and organizational transformation among small and medium enterprises in developing countries.

Keywords: trade liberalization, tariffs, skill composition, occupations, firm-level adjustment, Vietnam

JEL codes: F13, F14, F16, J23, J24, L25