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

Trade and Employment: From Myths to Facts
3.3.4.3 Labour market assumptions in CGE models
CGE models combine the logic of various partial equilibrium models into one, and
so the process of profit maximization that is used to derive the demand for labour
appears in both. Some combination of prices (in this case the wage rate) and quantities
(employment) bring about an equilibrium. Structuralist CGE models, such as the
prototype dis cussed in the example of Chile, typically assume fixed real wages and
take investment as the independent variable of the system (Gibson, 2009; Polaski,
2006). 35 If the economy is demand driven, a rise in exports will increase employment,
despite the rise in imports. 36 Structuralist models generate much higher employment
multipliers than do standard CGE models, primarily because of the assumption of
excess supplies of labour.
Kurzweil (2002) notes that the standard approach to modelling the labour
market in a CGE model is based on the distinction between factors and goods. In
the simplest framework, labour is a homogeneous factor of production and is used
as an input into a production function that takes a Leontief (fixed coefficients),
Cobb-Douglas, CES or translog form as discussed above. In static models, the supply
of labour is usually taken as a given parameter but, in dynamic models, assumptions
about the labour force participation rate can be combined with population forecasts
to determine the supply endogenously.
Figure 3.5: Increasing the productivity growth rate by 0.5 per cent
Employment
12000
10000
8000
6000
4000
2000
Base-productivity growth = 0.005
Simulated-productivity growth = 0.01
0
1990 1995 2000 2005 2010 2015 2020
35 Investment is often determined by “animal spirits” or some other exogenously specified variable.
36 This shifts the focus to what determines investment and this is, of course, a notoriously
diffi cult question as noted above.
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