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

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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 110
Chapter 3: Assessing the impact of trade on employment: Methods of analysis easily as higher employment causes higher productivity. Recent attempts to solve this problem have instrumented employment by changes in labour taxes since the latter should be unaffected by changes in productivity. Several authors have found a strong negative relationship between productivity and employment, Beaudry and Collard (2002), among others. 48 A casual conversation with the data does not lead to the same conclusion. Since reliable data for world employment are not readily available, a work-around is necessary. One approach is to replace employment with the labour force, a variable widely reported, under the assumption that there is no trend in unemployment rates over time. This proxy certainly reduces the variability of the dependent variable and leads to inflated t-statistics as reported below. Whether the resulting upward bias in reported t-ratios is sufficient to create a false impression of significance is a judgement left to the reader. To counteract spurious correlation, the regressions below use time fixed effects as discussed above. Country fixed effects partially compensate for the endogeneity, since what would be a large error associated with a large value of the independent variable ρ is absorbed into the dummy variable or constant term. The results of the regression are presented in table 3.8. Table 3.8: Dependent variable: Employment Regression 1 2 3 4 ln ipc 0.307*** 0.009 0.307*** 0.285*** (0.013) (0.008) (0.013) (0.018) Trade 0.001*** (0.000) cons 11.707*** 14.641*** 11.707*** 11.779*** (0.130) (0.088) (0.130) (0.176) Observations 4.568 4.568 4.568 3.536 R2 0.127 0.000 0.127 0.123 R2-adjusted 0.127 0.000 0.127 0.123 Source: Author’s calculations based on World Bank (2009). Standard errors in parentheses. *** p < 0.01, ** p < 0.05, * p< 0.1. Notes: 1. The dependent variable is the log of the labour force. 2. The variable ln ipc is the log of income per capita. 3. The variable trade is the sum of exports and imports divided by GDP. 48 This work would suggest that protection is the right way to save jobs since protection reduces productivity and therefore increases employment. 111
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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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20 See Harrison and Rodriguez-Clare
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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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