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

Trade and Employment: From Myths to Facts
rises, as the sectoral mix comes to favour more labour-intensive sectors. This could
come about due to specialization in labour-using industries as the result of trade.
This is an obvious point, but one that should be kept in mind throughout the discussion
to follow. Still to a first order approximation, growth in demand per capita
appears to be the main determinant of employment growth.
Supply side models with full employment might be applicable for developed
countries but are much less convincing when applied to developing economies. Still,
there are important links between the two: even in models without full employment,
if trade can be shown to increase the rate of growth of output, then ipso facto, trade
would increase the rate of growth of employment. The question of whether trade
is good for employment then can evidently be decomposed into whether trade is
good for growth and how growth and productivity change are related. Davidson
and Matusz (2010) point out, though, that the trade-growth relationship may be affected
if the labour market is characterized by imperfections. In their book on trade
with equilibrium unemployment, they argue that multiple equilibria is more the
rule rather than the exception in such cases. This implies that, with the same initial
conditions, economies can follow a “low-trade” or “high-trade” growth path. 2
The question of how growth and productivity changes are related has received
a good deal of attention in theoretical discussions of the last century. For Keynes,
in the General Theory, the decision to invest was shrouded in mystery. In the simplest
account, investment is driven by profitability, which rises with productivity and capacity
utilization. The relationship is complicated by the fact that current profitability
might not be a good indicator of future profitability, and certainly it is the latter
that drives investment. Moreover, investment does not occur in isolation: there are
problems of coordination between sectors. Keynes’ investors had to think both
about what the future was to bring as well as what their colleagues thought about
what the future was to bring. This was all too complicated for theory to handle so,
for Keynes, investment was determined by a mixture of the objective measures of
productivity and capacity utilization with a subjective component he called “animal
spirits” (Keynes, 1936).
Other important theorists, such as Solow (1956), followed suit, taking the
propensity to accumulate as essentially given and technical change as exogenous.
New growth theories have attempted to endogenize technological change depending
upon the path the economy takes, the availability of human capital, positive externalities
or spillovers and deliberate investment in technical progress (Romer, 1986;
Romer, 1990). These models, well worth exploring in their own right, are essentially
elaborations of the problem identified by Keynes. In every case, productivity matters
and is directly related to investment and growth.
2 A fundamental finding is also that factor endowments no longer determine the pattern of tradeinduced
specialization, which can instead be driven by differential turnover rates across domestic
sectors.
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