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

Chapter 2: New evidence on trade and employment: An overview
tioned in the introduction: trade and employment in general equilibrium; asymmetric
bargaining power; trade liberalization when unemployment is already high;
the quality of jobs; and trade in tasks.
2.3.1 The general equilibrium effects of trade on employment are
significant
In a study of the South African economy, Rodrik (2006) notes that South Africa’s
unemployment rate (between 24 and 40 per cent) is one of the highest in the world.
Many observers blame the unions for excessively high wages and thus unemployment.
However, Rodrik finds that the root cause of high unemployment in South
Africa is not the unions but the shrinkage of the manufacturing sector since the
early 1990s. According to Rodrik, the weak performance of the export-oriented manufacturing
sector has deprived South Africa of job creation at the relatively low end
of the skill distribution. Econometrically, Rodrik shows that import penetration is
one of the key factors behind weak performance of the export-oriented manufacturing
sector.
In a study of the Brazilian economy, Menezes-Filho and Muendler (2007)
combine insights from the Melitz (2003) model with worker heterogeneity providing
a compelling empirical example of the importance of some of the more recent theoretical
breakthroughs. These authors link worker-level panel data with firm-level
data and industry-level data to obtain a rich dataset that allows them to test many
implications of the most advanced trade models (for example, heterogeneous-firm
models that incorporate heterogeneous labour) for Brazil. By doing this, the authors
are able to assess the impact of Brazil’s trade liberalization during the 1990s on jobs,
while controlling for a number of worker-specific, firm-specific, industry-specific,
and economy-wide structural reforms. Their dataset allows them to follow workers
throughout the liberalization period and observe the path of their employment history
in greater detail than previous studies. They are particularly interested in the
effects of trade liberalization on employment status, type of employment (formal
or informal), and job reallocations.
Their results show that firms in industries with a “comparative-advantage” 15
and exporting firms16 shed workers more frequently. Moreover, firms with comparative
advantage and exporting firms also hire workers less frequently than the average
firm. Thus, on net, trade liberalization leads to net employment losses in these
firms. This is surprising given the standard predictions of international trade models
that would indicate that these sectors and firms would potentially hire more workers
when liberalization occurs. Furthermore, they also show that tariff reductions and
increased import penetration are associated with an increase in the likelihood of a
15 Those industries where Brazil has a comparative advantage with respect to the rest of the world.
The authors use UN COMTRADE data from 1986–98 to calculate sectoral-level comparative
advantage measures following Balassa (1965).
16 Which may or may not be firms in industries with a sectoral comparative advantage.
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