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

Chapter 6: Trade adjustment costs and assistance: The labour market dynamics
Table 6.1: Components of adjustment costs 5
Social
adjustment
costs
(aggregate)
Private
adjustment
costs
Publicsector
adjustment
costs
Labour
Capital
Source: Author’s table based on Laird and de Córdoba (2006).
Unemployment
Lower wage during transition
Obsolescence of skills
Training costs
Personal costs (e.g. mental suffering; not
considered here)
Underutilized capital
Obsolete machines or buildings
Transition cost of shifting capital to other
activities
Investments to become an exporter
Lower tax revenue
Social safety net spending
Implementation costs of trade reform
There is a fair amount of empirical evidence that trade liberalization may entail
significant losses for some groups. For instance, several studies report that replaced
workers may earn substantially less in their new occupations, even several years after
replacement. Jacobson, Lalonde and Sullivan (1993a; 1993b) provide examples for
the United States. Whether this is a temporary phenomenon, and thus an adjustment
cost, or a permanent phenomenon is often difficult to determine. In addition to
costs that are borne by workers, capital owners and firms can be adversely affected.
Machines may become obsolete, and firms that want to capture new export opportunities
may have to invest in order to become an exporter.
One reason why it is important to look at private adjustment costs is that they
are typically unevenly distributed, as some factor markets work more smoothly than
others to redirect resources that are freed up through liberalization. Adjustment costs
may be concentrated in specific sectors, as would be predicted by traditional trade
theory, whereby industries with a comparative advantage increase and others decrease;
or they may be concentrated among companies of a specific size, as predicted by
the so-called new new trade theory that predicts reallocation within industries with
larger, more productive firms being more likely to grow and smaller, less productive
firms being more likely to shrink. There may also be strong differences in regions or
personal characteristics, such as skill levels, that imply that different factor owners
5 Matusz (2001) argues that not all private costs are societal costs. Someone deciding to accept a lower
wage before retirement, who continues to be paid according to his productivity, entails a private cost
but no societal cost. We focus only on the transition period and, thus, if the worker would continue
to receive a lower wage, it would be a permanent change and, therefore, not an adjustment cost.
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