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

Trade and Employment: From Myths to Facts
these difficulties, it might be worthwhile to consult some data for an opinion as to
the slope of the long-term relationship between trade, productivity and employment.
If trade is intended to promote higher levels of employment, it must do so
through the mechanisms discussed above, notably, either that the economy must
grow in a balanced fashion with no change in factor prices or, if growth is unbalanced,
any subsequent rise in the aggregate labour coefficient should not offset the growth
in output. So far, the empirical literature has not spoken with a consistent voice on
the relationship between trade policy and employment. As noted, there are severe
problems of endogeneity, with employment policy as a determinant of trade policy
as much as the other way around.
Indeed, even openness itself is difficult to measure. Sachs and Warner’s influential
index of openness included a range of variables that would seem to be important
(Sachs and Warner, 1997). It is a binary variable with a value of zero for a closed
economy and one for an open economy. To qualify as closed, the economy must
satisfy only one of the five following criteria: (1) average tariff rates exceed 40 per
cent; (2) non-tariff barriers on more than 40 per cent of imports; (3) an explicitly
socialist economic system; (4) a state monopoly on its major export; (5) a blackmarket
premium on the exchange rate that exceeds 20 per cent during either the
1970s or 1980s.
A closed economy is thus defined somewhat subjectively, but this is more
than a typical portmanteau re gression variable in that economies can qualify as
closed in a variety of ways, and introducing them separately may not yield stable tscores
due to their high levels of multicollinearity. The Sachs-Warner dummy has a
high and robust coefficient when inserted into growth regressions and was subjected
to exhaustive sensitivity analysis, including more than 58 potential determinants of
growth.
Rodriguez and Rodrik (1999) point out that the variable actually measures
macroeconomic mismanagement, especially around the real exchange rate, a key measure
of competitiveness. This is, of course, broadly consistent with the major message of
this chapter: employment, and derivatively, the quality of employment depends not
on trade but rather on how well trade is managed. Rodriguez and Rodrik (1999)
conclude that the Sachs and Warner indicator serves as a proxy for a wide range of
policy and institutional differences and thus it yields an upwardly biased estimate of
the effects of trade restrictions alone. Edwards (2002), correcting in various ways for
heteroskedasticity, substitutes another linear combination, more heavily weighted
toward even more subjective conceptions of openness, including an index compiled
by the Heritage Foundation. Rodriguez and Rodrik are critical, noting numerous
instances of judgment bias in sample selection and lack of counterparty robustness
(robust in own but not other studies). They conclude that the relationship between
trade and growth enjoys sketchy support at best and, while the econometric literature
fails to soundly reject the null, it provides a weak foundation for policy advice (Rodrik,
1997).
As noted, a second major problem is simultaneity: in regressions of output
per worker and employment, greater productivity can cause higher employment as
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