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

Trade and Employment: From Myths to Facts
w is the nominal wage and L is employment. Bars indicate a floor for the wage
and full employment for labour. Thus, if there is slack in the labour market such
that L – L > 0, then the complementary condition holds as an equality, w – w
= 0, and vice versa. This approach can be used to model the boundary between full
and less than full employment scenarios.
Another innovative example is to introduce labour unions in the labour market
specification. Workers and firms can explicitly bargain over wages or employment
levels, with the union setting the wage and firms making the employment decision.
Unions may also decide to maximize employment subject to a minimum acceptable
wage. A simple approach is to set up a monopoly model to endogenously define
wage differentials to reflect union power as in Thierfelder and Shiells (1997).
Structuralist models are useful for the analysis of labour market deregulation
and its effects on wages, employment and incomes of the economy as whole. The
fine structure of these models is unhappily beyond the scope of this chapter, but
note in passing there is a fundamental property of CGE models that can be at seen
as both a strength and weakness. Supporters of living wage, fair trade, better factories
and decent work initiatives can use CGE models to quantify the costs of these programmes
in terms of the well-being of those left out of such programmes. Partial
equilibrium models ignore the plight of rejected workers, but economy-wide models
should not and often do not. Whether they fill the informal sector, return to school
to acquire human capital, or enjoy their leisure time, these agents should be accounted
for in the CGE. This may raise the cost of reformist policies to an unacceptable level,
or the reverse, enable the political classes to make informed decisions about the cost
of closing down “sweat shops” and the like.
The above illustrates that labour markets can be modelled in a variety of ways.
One of the main attractions of CGE models is that they can incorporate a wide
variety of adjustment mechanisms in markets, ranging from the extremes of pure
price or quantity-clearing markets to rationing, monopoly pricing, administered or
foreign border prices. In any given model, a number of these adjust ment mechanisms
can happily coexist, although subsequent interpretations of results can become somewhat
opaque. It is, therefore, important to carefully chose labour market assumptions
in accordance with the reality in the economy that is represented in the model.
Making the right choice is particularly important in dynamic models. The impact
on employment of trade depends on the assumptions made and, since the effects
are cumulative in dynamic models, there is a risk of creating a cumulative implausibility.
The choice of CGE model also matters. The original CGE models were all
one-period set-ups for which comparative static changes (derivatives) could be computed.
Many standard CGE models remain static owing to the great technical difficulty
of inserting (many simultaneous) intertemporal optimization models into a common
framework. Once these formidable challenges have been met, however, they may still
fail the test of plausibility, simply because their assumptions seem so unreal.
Structuralist models deal with this problem by assuming simple stock-flow relation-
96
(w / w)(L – L) = 0 (3-5)