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

Chapter 3: Assessing the impact of trade on employment: Methods of analysis
for workers in penetrated industries versus those in others. Return to figure 3.6 and
consider that the interaction of the skilled premium with import penetration must
there change the slope of each of the separate regressions in the right-hand panel.
Galiani and Sanguinetti (2003) find that the interaction terms are indeed significant
but not large enough to explain the more than about 16 per cent of the
skilled labour premium. This is certainly an interesting result and this methodology
could easily be applied in a number of different countries. One important point to
mention, however, is that since import penetration does not explain much of the
rising skilled-labour premia, something else must. When the unknown effects are
fully accounted for then perhaps it will be seen that import penetration suffers from
omitted variable bias. Further research would be needed to answer this question definitively.
It should not come as a surprise that trade liberalization leads to an increase
in the skilled-labour wage rate relative to the unskilled wage rate. As old sectors contract
and new sectors expand, workers with greater mobility, non-specific creative
abilities and generally higher levels of education will be in short supply, and even
more so than in times of more balanced growth. The wage premium therefore reflects
the reality that change requires adaptive talent, and the signal sent to those without
that adequate human capital is that all the incentives are pointed in the direction
of taking greater advantage of the educational system. Indeed, if skill bias in wage
growth did not appear, one could be appropriately sceptical that any change was
actually taking place in the economy.
3.4.3 Trade, productivity and employment
The previous section conveyed a story of rising demand for labour, but with a lag,
as liberalization proceeds. Wage inequality sends a powerful signal that new opportunities
for significantly better living standards are present if one takes the proper
steps to prepare. This is an optimistic scenario and a reality that not all countries
have experienced. The transition to openness might begin with significant import
penetration, job loss, but then lack the investment necessary to open new branches
of production with an export orientation.
Might it be possible to determine empirically the slope of the implied relationship
between employment and productivity? The problems with a project of
this nature are legion, however, in that one must deal with simultaneity (the correlation
between the independent variable and the error term) as well as the usual
problems of data reliability and comparability. Above all, there is the problem of
lack of data on productivity and employment. Both have to be manufactured from
existing data sources before any attempt at estimation can be made.
A second major estimation problem comes in the weighting of the data. Is it
really possible to take one observation of a country the size of China and India
along with states a micro-fraction of their size and deduce anything of scientific
value? Finally, there is the problem faced by most time-series studies that spurious
correlation must be removed by way of co-integration or other techniques. Despite
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