Production fragmentation and factor price convergence

In this analysis, we empirically analyze if the nature of trade matters for international factor price convergence. In particular, we examine whether factor prices converge when country pairs involve with more bilateral production fragmentation arrangements. We apply panel fixed effect techniques using data for five EU countries. The analyses are controlled for alternative trade related indicators such as bilateral trade intensity and bilateral intra-industry trade as well as for industrial similarity variables. We find that bilateral production fragmentation plays a key role in labor cost converging effects of trade.