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

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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 146
Chapter 4: Trade and the informal economy results, Fiess and Fugazza call for more research in this important area that involves trade and poverty. Another strand of econometric literature focuses on turbulence in employment. This is related to the creation and destruction of jobs in certain sectors and the mobility between sectors, including between the formal and the informal sector due to fluctuation in trade. Blanchard (2005) analyses trend data from industrialized countries and shows that the gradual restructuring of such economies towards greater openness does not lead to more turbulence in employment. Turbulence emanates from restructuring within economies and, contrary to what trade theories suggest, leads to job reallocations within sectors rather than across sectors. Jansen and Turrini (2004) also observe that turbulence in employment does not mean net job loss. Comin and Philippon (2005) use firm-level data to construct sales volatility and find that higher volatility need not mean higher job creation or job loss. Ljunqvist and Sargent (1998, 2005) insist that turbulence increases skill specialization and wage differentials and that this may actually create rigidity in labour movement across sectors. The findings suggest that the outcomes of trade liberalization depend more on the structure of the individual economy rather than in the intrinsic nature of trade liberalization. Neoclassical economics predict that open trade will generate gains from trade. However, various econometric studies reveal that this is not always the case. Econometric studies indicate that conditions specific to each country determine the outcome of trade more than the fact of open trade. In this sense, the CGE models are capable of capturing the structures intrinsic to each country and examining the impact of open trade therein. 4.4.3 Computable general equilibrium (CGE) models Quantitative studies based on CGE models are useful in examining the impact of policy changes on production, employment, wages and other variables by sector, including informal units and informal workers. General equilibrium models are useful when a policy change that targets a specific sector has an effect on other sectors or has second-round effects, such as income effects. Since the informal economy is so large in many developing countries, it is important to assess the impact of trade policy changes on the economy using general equilibrium models. Some studies have used CGE models in relation to the informal economy. Savard and Adjovi (1997), and Paquet and Savard (2009), study Benin’s informal sectors in response to changes in Government policies. Gibson and Godoy (1993) study Bolivia through a 38-sector social accounting matrix (SAM) that helped them to assess the short-term impact on the earnings of workers in the informal sector. Gibson (2005) studies Bolivia through a CGE model and presents findings showing that a rise of the informal sector had reduced the output of the formal sector. Bautistia et al. (1998) study Zimbabwe using a CGE model to quantitatively examine the income and equity effects of trade liberalization, fiscal and land policies. The exercise reveals that positive effects on income may not have a positive impact on equity. Kelley (1994) studies Peru through the CGE model and observes that the informal 147
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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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ASSESSING THE IMPACT OF TRADE ON EM
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REFERENCES Chapter 5: Gender aspect
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