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

Trade and Employment: From Myths to Facts
Box 4-4: Methodology suggestion to quantify trade liberalization
to capture effects on non-tradables
Apart from using the standard import tariffs, the effect of trade liberalization on informality
can also be estimated by using an input-output matrix (IOM) to calculate
an import tariff that reflects the taxes payable on imported inputs more precisely.
The input-output matrix shows the intersectoral transactions at current producer
prices, which can be expressed as shares of the total output of each sector. Moreover,
the input-output matrix also contains the share of imported inputs for each sector.
Therefore, apart from summarizing the intersectoral dependence, the IOM tariff also
reflects the relative importance of imports across sectors. Among other virtues, this
tariff allows assignment of a real import tariff to the non-tradable sectors, because
of their interactions with the tradable ones.
hand, Lederman et al. (2006), using estimations of the gravity model of trade, argue
that there is little evidence that Mexican (and Central American) non-fuel overall exports
were affected. It is also noteworthy that the sharp increase of informality seems
to occur with the relaxation of restrictions on Chinese textiles and apparel imports
in the United States. The overall reduction in exports due to the US recession may
have had a straightforward impact through a reduction in productivity that, in the
absence of wage rigidities, led to depreciation of the currency concomitant with a
rise in relative sector size and relative employment in non-exporting firms. It is likely
that with a slowdown in the US economy, the opportunities became relatively better
in informal micro-enterprises. In Mexico, medium-sized and large firms are still becoming
more formal over time. Therefore, the shifts in informality measured may
be due to the increased relative attractiveness of working for micro-enterprises over
the preceding five-year period, and not to greater subcontracting or within-large-firm
informality due to trade opening in Mexico.
Overall, the econometric analysis provides supporting evidence for the hypothesis
that the tariff elimination process undertaken by Mexico when joining NAFTA
in 1994 has helped reduce the incidence of informality. Increasing competition from
other developing countries in areas where Mexico has a comparative advantage could
lead to increasing informality.
The studies discussed above analyse specific developing countries and provide
interesting insights into the impact of trade on informality. However, due to the
specific circumstances in each country, results cannot easily be generalized. Fiess and
Fugazza (2008) tried to work through statistical macro-level and internationally comparable
data to attempt to find relationships between trade and informality. But the
results yield a mixed picture. While cross-sectional data suggest that opening up of
trade reduces informality, panel data suggests that the reverse is true. Micro-level data
seem to suggest that lower tariffs and lower restrictions reduce informality in countries.
In a dynamic panel estimation set-up that accounts for endogeneity, the authors find
that informal employment decreases with deeper trade liberalization, while informal
output increases. The authors argue that their results may suggest that the productivity
of the informal sector increases after trade liberalization. Due to the partly conflicting
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