Trade and Employment From Myths to Facts - International Labour ...

Chapter 3: Assessing the impact of trade on employment: Methods of analysis
Figure 3.4: The impact of tariff reduction on employment
Employment
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Box 3-8: Trade and employment: The role of productivity
Gibson (2009) shows in a simple model that the relationship between trade and employment
is essentially a relationship between productivity that reduces the demand
for labour, ceteris paribus, and growth, which increases the demand for labour. The
relationship between productivity and investment is a difficult one to measure with
any precision, but one can be fairly sure that a rise in productivity will spur a rise
in investment, output and ultimately the demand for labour.
Productivity gains are certainly lethal to employment in demand-driven models with
fixed investment. The reason is obvious from the structure of demand that depends
largely on consumption. Since consumption depends, for the most part, on labour
incomes, a reduction in employment quickly drives down aggregate demand. When
there is quantity clearing only, the effect can be quite strong, as shown in figure 3.5.
There, employment in the Chile CGE for the base run is compared to a simulation
with twice the base level productivity gain, from 0.5 per cent per year to 1 per cent.
No other change is made. In particular, it is seen that the level of employment
increases much less rapidly as a result of this small loss. There is much less inflation,
of course, but the real wage for both skilled and unskilled labour remains fixed.
Interestingly enough, real GDP in this simple model does not change. The country
is producing exactly the same quantity of output but with less labour. Where does it
go? There might well be re-distributional consequences, of course, but in reality,
some of the output will filter down through the informal sector to the rest of the
economy. Total labour hours will likely be the same or higher. This distribution of
productive activity will be highly skewed, of course.
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