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

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TRADE ADJUSTMENT COSTS AND ASSISTANCE: THE LABOUR MARKET DYNAMICS 6.1 INTRODUCTION By Joseph Francois, Marion Jansen and Ralf Peters 6 To benefit from trade and trade liberalization, economies have to reallocate factors of production within and between sectors. This structural change is the source of gains from trade but brings with it costs of adjustment. Evidence has, for instance, confirmed that some groups of workers tend to face temporary unemployment and lower income when their jobs are lost as a result of international competition Adjustment to trade reform or to changes in trade flows have always tended to be rather high on policy-makers’ agendas. In the United States, for instance, the Trade Adjustment Assistant programme (US-TAA) was established as early as 1974. The programme aims at assisting workers and enterprises that are negatively affected by trade reforms or changes in trade flows. The European Union (EU) introduced a similar programme, the European Globalization Adjustment Fund, in 2006. Also at the multilateral level, trade negotiators have felt compelled to deal with the issue of adjustment. The World Trade Organization’s (WTO’s) Agreement on Safeguards and Countervailing Measures, for instance, contains explicit references to the adjustment process following changes in trade flows. The adjustment process following trade reform has also been the subject of studies published by relevant international institutions 1 and is being discussed in the context of Aid for Trade. 2 Compared with the attention that adjustment challenges have received in the political debate, the academic literature on the subject is rather meagre, notwithstanding a certain revival of interest in the subject in recent years. This lack of academic interest in the topic may be due to the fact that in early empirical work, adjustment costs were estimated to be negligible when compared to the long-run gains for the 1 See, for instance, OECD (2005a), UNCTAD (Laird and de Córdoba, 2006), and the references to Brahmbhatt (1997) and Bacchetta and Jansen (2003) in Chapter 9 of Davidson and Matusz (2010). 2 See, for instance, ILO, OECD, World Bank and WTO (2010). 213
Trade and Employment: From Myths to Facts economy as a whole. It can also partly be explained by the difficulty in obtaining data necessary to estimate adjustment effects and by the complexities adjustment considerations introduce into standard trade models. Because of this relative lack of analytical and empirical work on the phenomenon of adjustment to trade, policy-makers often look in vain for clear answers on crucial policy questions, such as the duration of the adjustment process following trade reform, the likelihood and extent of unemployment surges following trade shocks or reforms and the best policies to facilitate relevant adjustment processes. Finding answers to these questions is of political importance for a variety of reasons: ● Policy-makers need to be able to evaluate the political and economic (for example, budgetary) consequences of possible temporary drops in gross domestic product (GDP) or surges in unemployment. ● Evidence suggests that the distribution of adjustment costs is skewed and that adjustment costs can, as a consequence, be very substantial for certain individuals. Policy-makers may wish to consider assisting individuals suffering from particular hardship during adjustment processes. ● Costly adjustment processes reduce the net gains from trade reform. This is particularly worrisome if poorly executed adjustment processes impede economies from reaching the optimal equilibrium. ● Those suffering during the adjustment process following trade reform may oppose trade reform. Guidance on how to pre-empt such opposition would be beneficial for policy-makers and in the long-run for the economy as a whole. This chapter tries to address these and other relevant questions by providing a summary of the existing economic literature on the subject of adjustment to trade liberalization. After a presentation of the definition of adjustment costs used in this chapter, the measurement of adjustment costs is discussed in detail in section 6.3. In particular, indices measuring intra-sectoral employment churning are developed. In that section, different methodologies to measure adjustment costs, both ex-ante and ex-post, are presented and a summary of existing empirical evidence and simulation exercises is provided. Most of the empirical evidence focuses on industrialized countries, as evidence on developing countries is particularly scarce. In section 6.4, arguments in favour of adjustment assistance are presented, based on a discussion of the relevant theoretical economic literature. A discussion of different policy options to address adjustment challenges and of existing evidence on the effectiveness of different policy options follows. Section 6.5 concludes. 6.2 DEFINING ADJUSTMENT COSTS The measurement of the effects of trade liberalization on welfare generally involves comparison of welfare levels before and after liberalization, i.e. after all factors of 214
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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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Chapter 3: Assessing the impact of
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APPPENDIX 3.A: TABLES Chapter 3: As
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TRADE AND THE INFORMAL ECONOMY 4.1
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Chapter 4: Trade and the informal e
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For more than two decades, quantita
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