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

Trade and Employment: From Myths to Facts
Table 2.1: Global unemployment rates, by region
Region Unemployment rate in
1986 1994 2007
% % %
East Asia and the Pacific 2.31 2.94 10.69
Europe and Central Asia -- 9.41 15.02
Latin America and the Caribbean 5.46 7.24* 10.17
Middle East and North Africa 12.81** 20.83
South Asia -- 3.9 16.88
Sub-Saharan Africa -- -- 28.77
High income: non-OECD -- -- 7.74
High income: OECD 7.68 7.63 5.75
* Average (1993, 1995). ** Earliest available (1991)
Source: Authors’ calculations using data from CIA World Factbook 2007 and WOI (2010), see:
http://www.photius.com/rankings/economy/unemployment_rate_2007_0.html.
Today, one of the most commonly cited reasons for unemployment in both
developed and developing countries is increased trade and offshoring. In developed
countries, the fear is that jobs are being exported to low-wage countries. In developing
countries, the primary concern is that trade liberalization is wiping out entire sectors
that cannot compete with cheaper imports from China or more sophisticated products
from developed countries. Despite the prominence of these concerns in the public
debate, there has been remarkably little theoretical or empirical work on this issue. 3
Part of the reason for this is that the standard Heckscher-Ohlin-Samuelson (HOS)
trade model assumes full employment, which has tended to shift the discussion of
the effects of trade away from labour market outcomes. Additionally, unlike unemployment
in developing countries, unemployment in many developed countries has
been relatively low for several decades, making the assumption of full employment
seem reasonable to many economists primarily focused on developed countries.
As Krueger (1983) noted, the standard HOS model is not a satisfactory analytical
framework within which to study problems of unemployment in developing countries.
For the purposes of her volumes, she relied heavily on extensions of the HOS framework
that emphasized the importance of factor and product market distortions. More
recent theoretical advances in the trade literature incorporate firm heterogeneity
(Melitz, 2003), search frictions and equilibrium unemployment (Davidson and
Matusz, 2009), 4 firm heterogeneity and bargaining between workers and employers
(Egger and Kreickemeier, 2009), and all of the above plus idiosyncratic match quality
(Helpman, Itsknoki and Redding, 2009). These recent studies have given more
3 See Goldberg and Pavcnik (2007).
4 This reference is to the recent book by Davidson and Matusz (2009), which synthesizes the work
these two authors have done incorporating labour market frictions into trade models. According to
Matusz, this work began in the 1980s when he was a graduate student at Michigan.
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