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

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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. 66
Chapter 3: Assessing the impact of trade on employment: Methods of analysis large wage inequalities could naturally be expected to emerge and persist. 6 Only when the adjustment process is fully played out, will the wage gap close. 7 The wage inequality that results from trade liberalization is not necessarily undesirable. 8 High wages signal the need for the formation of human capital specific to the demand for labour for the expanding sectors, and vice versa for those that are contracting. Any policy initiative that seeks to reduce inequality of this kind may well be counterproductive to the extent that it impedes the formation of specific human capital. Indeed, Wood (1997) notes that the skilled labour premium declined in the Republic of Korea, Singapore and Chinese Taipei as the virtuous cycle of rising exports, improved access to education followed by an increase in supply of skilled labour, took hold. Lopez-Calva and Lustig’s recent work on Mexico shows that wage differentials in Latin America have eroded over time as markets adjust, much to the surprise of most observers (Lopez-Calva and Lustig, 2010). Policy-makers nevertheless often decry the wage inequality that arises from “efficiency wages” paid to the workers lucky enough to find jobs in the export sector that in part reflect the comparatively vast quantities of capital with which they work. Some of the economic literature has taken up the task of explaining wage inequality as it presents an economic as well as sociological problem. Rodrik (1997) is an early attempt to promote globalization by way of calling for stepped-up public sector intervention to resolve wage and, more broadly, factor price inequality that seems to be emerging. More than a decade ago, Rodrik pointed out that the trend toward increased openness would increase competition. In highly competitive markets, there is little or no ability of producers to pass on idiosyncratic cost increases. Consequently, the demand for labour in competitive industries could be expected to become more elastic under a globalized trading system. Rodrik points out that larger, more aggressive public sector intervention may be required in order to prevent a backlash by those who have been hurt by globalization, free-trade and current-ac- 6 One response to rising competitive pressure is an increase in informality. Gibson and Kelley (1994) define the informal sector in a general equilibrium context as those who are forced to operate production processes that fail to return the average rate of profit when paying the going wage rate. These processes are defective in the sense that formal sector capitalists will not operate them. They nonetheless exist and can be utilized by those who have no other options. This conceptualization of informality is useful in analysing the impact of tariff reductions. Formal sector firms rendered unprofitable by tariff reduction fail and disappear, while informal firms simply adjust to the new competitive reality by accepting a lower rate of return, possibly negative, when evaluated at the market wage rate. Informality rises with import penetration. 7 Feenstra and Hanson (1997), for example, find that US firms outsourced mostly labour-intensive jobs, which raises equality both at home and in the host country. 8 Trade liberalization can also contribute to reducing wage inequalities. One way that wage equality can be brought about by trade policy is by reducing rents that accrue to firms and their workers in protected industries. As long-standing tariff protection is eliminated, unemployment in local labour markets rises, reducing the gap between the wages of experienced workers with significant learningby-doing skills and those that have had little formal-sector experience. The wage inequality that had previously existed in this case would be reduced or eliminated by pro-trade policies. This “levelling from below” is rarely an attractive process to observe in reality, but can in principle be defended on the grounds of standard economic theory. 67
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Trade and Employment From Myths to
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Trade and Employment From Myths to
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PREFACE Trade negotiations -bilater
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Trade and Employment: From Myths to
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EDITORS AND CONTRIBUTORS EDITORS Ma
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ACKNOWLEDGEMENTS The editors wish t
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APPPENDIX 3.A: TABLES Chapter 3: As
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TRADE AND THE INFORMAL ECONOMY 4.1
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GENDER ASPECTS OF TRADE 5.1 INTRODU
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and income-earning opportunities ge
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Figure 5.1: Description of gender i
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REFERENCES Chapter 5: Gender aspect
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