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

Trade and Employment: From Myths to Facts
2005). 13 Indeed, why countries seem to believe that it is optimal to protect their
low-skilled workers has been noted as a major “puzzle” by Hoekman and Winters
(2005). Doing so effectively forces them to produce the “wrong” goods and, furthermore,
effectively “protects” them from productivity-enhancing investment.
3.2.3 Which methodology?
In the context of the modern globalized economy, top-down planning in the traditional
sense may be a lost art (Gibson, 2008a). Davidson and Matusz’s (2010)
abovementioned work on trade with equilibrium unemployment, however, describes
a more bottom-up approach. Models should be constructed with clear attention to
the incentives and constraints a microeconomic agent faces. Policy can then be designed
around these incentives and constraints rather than reacting to the macro-level
properties that the interaction of the agents creates.
One of the major challenges economists face when building relevant models,
and subsequently trying to assess the employment impact of trade, is to control for
the impact of other variables on employment and to establish that observed changes
in trade flows or policy have actually caused changes in employment. Indeed, much
of standard macroeconomic empirical work of the post-war period, for example, has
been subjected to the debilitating criticism that all macroeconomic variables tend
to be correlated over time and thus imputed causality of established studies is in
fact only a correlation.
The gold standard for distinguishing causality from correlation is the so-called
randomized controlled trial. In this procedure, subjects are randomly allocated to
either a “treatment” or “control” group. The key is that they are randomly assigned
and the resulting samples are statistically equivalent. This does not imply that samples
are exactly the same, only that the reasons they differ are purely random. The “treatment”
sample is then exposed to the shock that is the subject of analysis. For the
purpose of this chapter, the shock would be a change in trade policy. If the protocol
is observed, no sophisticated statistical processing is then required to assess the employment
effect of a change in trade policy. One would only need to calculate the
employment level in the treatment cohort and compare it with that of the control
group. It is not straightforward to artificially construct randomized controlled trials.
But social scientists sometimes benefit from so-called “natural experiments”, ones
13 Imperfectly competitive product markets might well enhance the adjustment process and produce
as a by-product even more wage inequality. Harrison and Hanson (1999) and Currie and Harrison
(1997) note that firms may well reduce their profit margins to establish themselves in the global
market. Firms may also hoard labour if forecast growth is strong and they are investing in more
productive capital equipment. Artificial wage differentials are another matter. If the public sector
promotes wage differentials that would not be validated by the private market, serious distortions
may result. Paraguay’s policy of subsidizing tertiary education and then finding it necessary to provide
public-sector employment for graduates is a classic and unfortunate example. Wage differentials
that arise in this way cannot be defended as a normal market-signalling mechanism, indeed, quite
the reverse.
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