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

Chapter 2: New evidence on trade and employment: An overview
attention to the employment effects of trade liberalization and have moved away
from the HOS assumption of full employment.
In addition to these developments, there has been a significant change in focus
in the trade literature or, as Feenstra (2007) and Grossman and Rossi-Hansberg (2008)
would call it: a change in paradigm. Feenstra (2007) argues that trade theories and
the empirical evidence can be reconciled with the findings from the empirical literature
– although not “traditional” trade theories such as the Heckscher-Ohlin
model – if we “… adopt a new paradigm which emphasizes how tasks or activities
can be sent across borders.” 5 Instead of viewing trade – in goods and services – as
an exchange of material goods, 6 an increasing number of papers have approached
the study of trade as the exchange of specific tasks that form the value chain. 7
These theoretical advances have important implications for policy-makers in
developing countries. The three most important implications are: (1) the extent of
the gains in allocative efficiency associated with trade liberalization depends critically
on the institutional setting; (2) exposure to international trade can have an impact
on aggregate employment and therefore the rate of unemployment; and (3) exposure
to international trade can increase wage inequality in both rich and poor countries.
This means that governments can and should play a role in shaping the relationship
between trade and employment.
With this in mind, this paper builds on recent literature surveys on trade, employment
and inequality (Hoekman and Winters, 2005; Goldberg and Pavcnik, 2004
and 2007) to discuss the most recent theoretical and empirical findings in this field.
The paper is organized around what we consider to be some of the most important
features of developing country labour markets not sufficiently emphasized in the
recent trade literature. 8 First and foremost is the importance of the agricultural and
informal sectors in most poor countries. Even though most of the new theoretical
work is general equilibrium in nature, the focus of these models is still primarily on
activity in the industrial sector. This is because most trade theorists believe that industrialization
is the key to growth and that growth will automatically lead to job
creation. Nevertheless, by focusing only on outcomes in the industrial sector, these
studies leave out the majority of the population of most developing countries.
Detecting the general equilibrium effects of trade and offshoring on labour markets
in developing countries is complicated because of the large informal-sector presence
5 See Feenstra (2007).
6 By material goods we mean physical units of either finished or intermediate manufactured goods.
7 In this sense, a task can be anything from the assembly of a chair to data analysis or the design
of an airplane wing.
8 For example, in a review of the work on globalization and employment, Lee (2005) notes the importance
of taking into account movements in and out of the formal sector in developing countries.
He argues that the narrow scope of papers that focus primarily on the manufacturing sector leave
out the informal and non-manufacturing sectors of the economy, which is where most employment
takes place in low-income countries. As Lee notes, he is not the first to point this out. Greenaway
(1993), Collier (1993), and Agenor and Aizenman (1996) have all challenged the view that trade
liberalization leads to an increase in employment. Lee (2005) also notes that the effects of globalization
on employment vary greatly depending on regional and institutional factors and that the effects of
trade liberalization on employment should be analysed on a case-by-case basis.
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