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

Trade and Employment: From Myths to Facts
which cheap labour produces a cost advantage relative to competitors. As the tradefavoured
sector expands, the contracting sector must then release the factors of
production in proportions suited to its rival. If countries specialize in goods intensive
in their most abundant factor, then the return to that factor should rise with trade.
Since the inception of this theory, economists have held that poor countries should
specialize in labour-intensive goods so long as capital is in short supply relative to
labour. The expansion in demand for the labour-intensive good will then drive up
the price of labour. HOS is a theory with fully employed factors of production,
however, and so even though overall employment cannot rise, the quality of jobs
in poor countries improves with the trade, in so far as quality is measured by the
wage rate.
The HOS framework thus suggests that developing countries should specialize
in labour-intensive goods, given their excess supply of labour. Here the aggregation
across skill categories required for analytical models obscures the basic fact that
labour is heterogeneous with respect to skill and experience. There is no reason to
expect that an increase in demand for exports in a developing country would not
cause some disruption in those labour markets, similar to what is experienced as a
result of intra-industry trade in developed markets. While the broad range of developing
country exports might well be more intensive in unskilled labour, it is
impossible to ignore that in practice labour appears quite heterogeneous to firms
in developing countries. In South Africa, for example, textile manufacturers frequently
complain of a “labour shortage” despite the fact that there is 40 per cent
unemployment. This will have to be explained by increasing the resolution in the
labour market until differences as perceived by the firms themselves can be identified.
Once the detailed nature of the market is analysed, it is far less surprising that a
bubble in export demand might generate significant wage inequality, even in developing
countries and contrary to what standard HOS models predict.
There is, indeed, evidence that relative wages, of skilled compared to unskilled
workers, have tended to increase in numerous developed and developing countries
in the aftermath of trade liberalization. Outsourcing provides one mechanism by
which such wage inequality can legitimately arise. 5 To the extent that a ladder of
comparative advantage exists, countries will simultaneously take advantage of opportunities
to expand employment in a given skill category, while typically contracting
employment in less-skilled branches. Part of the phenomenon is that as unskilled
branches of production migrate from developed to developing countries, the demand
for skilled labour rises in both. This increases skill-based wage inequality on both
sides of the border. As the international division of labour progressively develops,
5 Current account liberalization also forces lower middle-income countries to experience competition
from even lower-income countries. Tariff reduction thus concentrates job opportunities on one rung
of the ladder of comparative advantage. Those with the appropriate skills benefit from the increase in
demand; those without suffer until their skills can be upgraded or they move into the local service
economy, the non-traded sector.
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