From the invisible handshake to the invisible hand?

There is a popular perception that increased competitive pressures in U.S. product markets are turning the employment relationship from one governed by implicit agreements into one governed by the market. In this paper, I examine whether changes in import competition indeed affect the use of implicit agreements between employers and workers in a key aspect of their relationship, wage setting. I focus on the extent to which employers, after negotiating workers' wages upon hire, subsequently shield those wages from external labor market conditions. If increased competition induces a switch from these implicit agreements to spot market wage setting, then: (1) the sensitivity of workers' wages to the current unemployment rate should increase as competition increases; and (2) the sensitivity of workers' wages to the unemployment rate prevailing upon hire should decrease as competition increases. I find evidence supporting both of these predictions, using exchange rate movements to generate exogenous variation in import competition. I then show more directly that increased financial pressure on employers is one mechanism behind these effects -- both of the wage-unemployment sensitivity c