Trade Adjustment Costs in Developing Countries: - World Bank ...

8Bernard Hoekman and Guido Portoassess wage impacts, Hanson focuses on how the global fragmentation of productionaffects the wage structure in developing countries and concludes thatoutsourcing has played a major role (both in increasing wage inequality and inraising the volatility of employment), especially in countries like Mexico or China.However, these adjustments are not present in other developing countries likeArgentina, Brazil, Chile and India, where quality upgrading, or skilled biasedtechnological change accompanying liberalization are more likely to play a biggerrole.Margaret McMillan takes a deep look at production off-shoring, the reallocationof physical manufacturing processes outside of a country’s border, and theimpact on labour markets (employment and wages) both in developed and developingcountries. Her review of the literature for developing countries corroboratesthe conclusions reached by Gordon Hanson above. Indeed, mostresearchers find that foreign firms pay higher wages and conclude that FDI hasbeneficial effects on host country labour markets. However, the magnitude ofthese effects varies substantially. The employment effects of FDI in developingcountries are less well understood but they are likely to be important. It is noteworthythat outsourcing to Mexico, for instance, has caused an increase in employmentvolatility. For developed countries (drawing heavily on studies aboutthe U.S. labour markets), the evidence on employment is mixed, with severalstudies finding complementarities between the operations of U.S. multinationalsabroad and domestic activity and others reporting instead evidence that “jobsabroad do replace jobs at home.” These effects are, however, small. 4 The impacton U.S. wages is often small too. McMillan ends with an interesting observation:in recent years, we have started to see off-shoring from developing countries likeChina and India.The following three chapters address additional themes related to labour marketadjustments in developing countries. Pravin Krishna and Mine Senses look atincreased labour income risk following liberalization. This could happen if opennessexposes import-competing sectors to a variable international economic environment.If trade induces reallocations of capital and labour across firms withinand between sectors and if similar workers experience different outcomes duringthis reallocation process, openness will raise individual labour income risk. Anotherlink between trade and income volatility emerges when increased foreigncompetition increases the elasticity of demand for goods and thus the elasticityof derived labour demand. This, in turn implies that shocks to labour demandmay result in larger variations in wages and employment, and hence increasevolatility in the labour market. Using U.S. data, Krishna uncovers two observations:first, those workers who switched industries experienced higher income4 McMillan also addresses the source of this discrepancy and concludes that for U.S. parents primarilyinvolved in horizontal activities, affiliate activity abroad substitutes for domestic employmentbut for vertically-integrated parents, home and foreign employment are complementary. She furthermoreclaims that offshoring is not the primary driver of declining domestic employment of U.S.manufacturing multinationals between 1977 and 1999 (the culprit instead being falling prices of investmentgoods, falling prices of consumption goods, and increasing import competition).