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

Chapter 3: Assessing the impact of trade on employment: Methods of analysis
ployment changes and economic growth”. These authors conclude that the preponderance
of studies do seem to show a consistent relationship between trade and
growth in income per capita. An outward orientation does seem to be superior to
an inward, self-sufficient course of growth. This seems to be the message of the
models and literature reviewed in this chapter, but with some substantial caveats.
Given the complexity of the nature of the relationship between trade and employment,
it is hardly a surprise to observe that the literature wanders somewhat
aimlessly. One of the aims of this chapter has been to provide an overview of existing
methods to evaluate the employment effects of trade. The methods discussed in
this chapter and their respective characteristics are summarized in appendix table
3.A-2. Another aim of this chapter has been to narrow the field of possible methods
to the point that they can converge to a common conclusion. While this chapter
privileges no particular methods, several key points emerge as to the proper way to
model the relationship between trade and employment:
(1) An economy-wide model is necessary to study the complex interaction produced
in a trading regime. Even the earliest ILO studies recognized this and
it remains true today. Partial equilibrium accounts that conclude that the interests
of some sectors have been damaged can lead to an anti-trade bias.
This is simply because the partial equilibrium approach fails to see how seemingly
unrelated sectors might benefit from the same trade policy that is so
destructive to the sector in question.
(2) Calibrated models, even if economy-wide, are not likely to produce good
policy if there are inad equate micro-foundations. The reason a solid microfoundation
is necessary is that all policy must ultimately act on people,
providing incentives that real-world agents can presumably understand and
incorporate into their decisions. Policy directed at aggregate indicators is rarely
successful; it must be directed to the people themselves. Many of the models
surveyed in this chapter are properly micro-founded.
(3) The data from econometric models should be used to test theories to the
extent possible, but should not be used to build the theories. This will preclude
the data from having any self-serving comment on the validity of the theory.
What the data seem to show is that trade is important to virtually every
country that has experienced large increases in employment. While openness
is not sufficient to drive up employment, it does seem to be necessary for
poor countries to break out of the cycle of poverty, low levels of human
capital and large informal sectors.
(4) It is important to note that people and not firms suffer adjustment costs.
Standard economic theory suggests that policy should follow this logic, that
is, direct assistance to individuals should be pre ferred to bailing out firms or
sectors of the economy. This may be a difficult policy recommendation to
follow in the real world, despite its pedigree among economists.
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