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

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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)
Chapter 3: Assessing the impact of trade on employment: Methods of analysis ships, often linear, and then calibrating the model to actual data as shown in the simple CGE for Chile above. 3.3.4.4 Evidence based on SAM-CGE models The largest impact of trade reform on employment seems to be from the effect that liberalization has on investment. Earlier CGE studies found that the gains from NAFTA -generated trade in Canada, Mexico and the US were small, less than 3 per cent of GDP over a decade. But standard CGE models do not typically address the inducement to invest in a dynamic context. The typical model has a neoclassical closure in which wages adjust to excess supply in the labour market and savings drive investment. With flexible product prices and elastic supply curves, an increase in the demand for exports can have a very small effect on wages and employment. The Global Trade Analysis Project (GTAP) model is one of the most innovative CGE frameworks to appear in recent years (Hertel, 1997). The model’s realism is enhanced by non-homothetic constant difference of elasticity (CDE) household preferences. It also incorporates international trade and transport margins as well as a banking sector that links system-wide savings and investment. Trade is modelled using bilateral trade matrices based on Armington elasticities. Factors include skilled and unskilled labour, capital, land and natural resources. Kurzweil (2002) examines three specifications of the labour market in the GTAP model using the GTAP 5 database. The first is a “plain vanilla” trade liberalization experiment in which agricultural trade barriers are removed in the European Union (EU) by 50 per cent for African products. The second has the same tariff cut but low-wage workers in the EU are protected by a fixed real wage for unskilled labour in both low- and middle-income countries as well as in the EU. The third reduces the mobility of labour relative to the base GTAP assumption of perfect in-country labour mobility. Finally, a portmanteau simulation combines all the effects, liberalization, fixed real wage and labour mobility into one. Kurzweil finds that the cut of the European tariffs on agricultural commodities raises welfare for the African regions. There is a slight decline in EU welfare. The different labour market extensions modify these results in various ways. Not surprisingly, the effect of labour immobility diminishes the impact of trade reform while the fixed real wage produces a large increase in welfare. Note that this is the conjugate of the effect discussed above: when quantities adjust in the labour market rather than prices, that is wages, the employment effects are much more obvious. With the fixed real wage eliminated, employment gains in the formal sector are not as great as wages rise. Kurzweil (2002) notes that “it becomes obvious that the characteristics of a country’s labour market have a significant influence on the outcome of a trade liberalization scenario”, but it would seem that the labour market structure is not what she is really getting at here. The difference in her simulations is how the model is closed, that is, with Keynesian demand-driven labour markets or with a more standard neoclassical flexible wage that eliminates excess demand or supply of labour. This point is fundamental to all CGE modelling: the nature of the closure is essential to 97
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Trade and Employment From Myths to
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Trade and Employment From Myths to
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PREFACE Trade negotiations -bilater
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Trade and Employment: From Myths to
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EDITORS AND CONTRIBUTORS EDITORS Ma
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ACKNOWLEDGEMENTS The editors wish t
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NEW EVIDENCE ON TRADE AND EMPLOYMEN
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Chapter 2: New evidence on trade an
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Region Annualized percentage change
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Region 1980 1985 1990 1995 2000 200
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Figure 2.4.b: Long-run association
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GENDER ASPECTS OF TRADE 5.1 INTRODU
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and income-earning opportunities ge
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Figure 5.1: Description of gender i
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Chapter 5: Gender aspects of trade
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A third view is that the type of jo
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REFERENCES Chapter 5: Gender aspect
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