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

Trade and Employment: From Myths to Facts
In table 3.8, regression 1 includes only country fixed effects while regression 2
has only time fixed effects. Regression 3 is estimated using two-way fixed effects, that
is there as a dummy variable for every year and every country. 49 In both regressions
1 and 3, the coefficient on the measure of productivity (in log form in the equations)
is positive and significant. Note that the time-only fixed effects model (regression
2) does not show a significant coefficient on the productivity variable.
The significance and positive sign of the coefficient on the productivity variable
continue to hold for regression 4, which uses two-way fixed effects and includes the
variable trade to measure openness in the economy (the ratio of the sum of imports
and exports to GDP). Including trade in the model reduces slightly the coefficient
on the productivity variable but it remains significant at the 1 per cent level. The
coefficient on the trade variable itself is also positive and significant.
These simple regressions can only be suggestive, but they lend support to the
notion that there is a positive relationship of labour productivity and trade with
employment.
Box 3-10: Structuralist and standard CGE models: Not that different after all?
It was argued above that the full employment assumption underlying much of the research in
CGE models seems inappropriate for countries with significant open unemployment and large
informal sectors. Most of the standard CGE models assume that savings drives investment and
that wages cannot remain in disequilibrium forever, and will eventually have to fall to the point
that the labour market will clear. Structuralist models, as was seen above, are based on the
reverse relationship, that investment drives savings and, moreover, that the long run is simply
a sequence of short-run equilibria.
The difference in views of how the world works may not be as momentous as it first appears.
Structuralist models assume that the independent variable of the system, investment, is driven
over time by capacity utilization and profitability. Therefore, if trade brings technological change,
which in turn causes productivity to rise faster than real wages, profits will have to rise. If it is
institutionally possible for investment to increase, then indeed the structuralist model will come
to resemble the standard model more closely. In other words, if productivity rises with trade liberalization,
and investment rises with productivity, the employment must rise eventually.
The simple regression findings presented in the main text lend support to the notion that there
is a positive relationship of labour productivity and trade with employment. This implies that
the gulf between the standard and structuralist CGE models might not be as large as it seems.
3.5 ASSESSING THE EMPLOYMENT IMPACTS OF TRADE:
QUALITATIVE METHODS
Qualitative methods in the social sciences start from the premise that the critical
factor in understanding the world is context. This general point expresses concern
about several specific features of quantitative analysis that, taken together, are seen
as stripping away the necessary context (Chabal and Daloz, 2006). The first of these
foundations of qualitative methods is the view that non-quantitative dimensions of
experience and behaviour are ignored in quantitative techniques discussed in section
49 Fixed effects models are voracious consumers of degrees of freedom, but the World Bank’s development
indicators database has (incomplete) data for a large number of countries back to the 1960s.
112