The Effect of Foreign Competition on UK Firm Level Employment: Theory and Evidence

JEL Classification F00, L00 and J00

Jozef Konings
Patrick P. Walsh

Katholieke Universiteit Leuven, LICOS, Blijde Inkomststrsst 5, 300 Leuven, Belgium and Department of Economics, Trinity College Dublin, Ireland.


In this paper we investigate the effect of increased foreign competition on home employment. The interaction of both product and labour market responses to foreign competition will be of key importance to understanding the impact of foreign competition on domestic employment. In a simple theoretical framework, we introduce both labour and product market assymmetries between home and foreign firms in an industry and show how these play a central role in the responses of home firms to increased foreign competition. We test the predictions of our theory using UK firm level panel data over the period 1982 to 1989 and find empirical evidence that supports our theoretical framework.


The authors are both members of the European Bureau of Economic Research. We thank Mike Harrison and Eric Strobl for useful comments on earlier versions of the paper. The paper was presented at the University of Leuven, University of Antwerp and Trinity College Dublin. We thank all participants for their comments. Special thanks go to Paul Gregg for providing us with the data.