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

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Trade and Employment: From Myths to Facts 3.3.2.3 Assessing the two-sector substitution model The strength of the two-sector factor substitution models approach is its simplicity and clarity in regard to basic principles of economics. 24 Factor share models are relatively cheap and easy to implement: Cobb-Douglas equations can be easily estimated and factor shares deduced. Since the wage bill is constant, two-sector substitution models based on Cobb-Douglas production functions can predict whether there will be a large quantity of new jobs with low wages or the reverse, so long as workers are paid their marginal product. In non-competitive environments, studded with minimum wages and other labour-market distortions, the marginal product of labour may be scarcely relevant. It is still possible, however, to say that if demand shifts from a sector with a low share of labour to one with a high share of labour, workers in some form or other will probably benefit. A weakness of the HOS-inspired labour share approach is that it does not often take into account inter-indus try relationships as do the input-output models discussed below. A second weakness of this approach is that the whole of traditional trade theory in the mould of HOS seems to be at variance with what is observed in the current trading arena (Hertel and Keeney, 2005). A serious objection to the HOS view of the world is that sectoral reallocation along the lines predicted does not typically take place. Instead, a sector expands to meet an increase in export demand. In exchange, the home country receives an import from the same sector of the trading partner’s economy. No factors are reallocated. Both sectors must either experience a rise in labour productivity or increased employment. Aggregate employment will then rise if there was slack in the labour market initially and wages will increase otherwise. Referring to the effects of the formation of the European Economic Community (EEC) and the US-Canadian auto agreement, Hertel and Keeney (2005) observe: 24 The HOS model does not allow for the possibility of intra-industry trade, i.e. the type of trade that typically takes place between industrialized countries. Although the bulk of trade still occurs between industrialized countries, trade between sectors with different capital labour ratios and radically different wages is still important and arguably increasingly so because of the increasing role of developing countries in global trade. The HOS model thus remains a valid instrument for trade analysis. 25 These models have their roots in the model first described by the young Harvard graduate student W. Leontief just after the turn of the century. 82 “Little resource reallocation took place; instead, trade seems to have permitted an increased productivity of existing resources, which left everyone better off.” 3.3.3 Input-output framework 3.3.3.1 Taking into account indirect employment effects The next step is to introduce multi-market equilibria by way of an input-output framework, a halfway house to the full general equilibrium specification. 25 These
Chapter 3: Assessing the impact of trade on employment: Methods of analysis Box 3-4: Input-output models: Some technical details Input-output models are used to analyse the impact of a change in final demand, including net exports on the levels of production. The models assume fixed coefficients for labour, capital and intermediate inputs. Let A = {αij } be the coefficient matrix such that each αij describes the use of input i for the production of one unit of output j and X = {xj } be a column vector of gross outputs, including intermediate goods. So-called dual variables can also be defined and interpreted as prices, denoted here by row vector P = { pi }. The equation dual to the material balance is then P = PA + VA where VA is a row vector of value added, and may be disaggregated into wages, profits, imports, taxes and rents as needed. 26 Final demand is denoted by F = { fj }, a column vector of outputs, and may be disaggre gated into consumption, government spending, exports and imports as needed. The essential equation of input-output analysis, known as the material balance, is then X = AX + F One of the most basic measures of the effect of trade on employment comes from estimating direct labour coefficients, or the inverse of labour productivity. Census data provides measures of value added and em ployment by sector and thus an index of the number of workers employed by a unit of value added can be constructed. 27 frameworks take into account backward linkages between trading sectors and the rest of the economy and therefore make it possible to assess the indirect employment impacts of trade reform or changes in trade flows. Economy-wide models of this type are usually based on either aggregate data from national income and product accounts or more disaggregated input-output tables. Regional models may link regional inputoutput matrices, analogous to the way international trade models link countries. The informal sector can also be treated in the same way, operating alongside the formal economy and trading with it. Lydall’s (1975) classic study for the ILO assumed that an increase in imports by a developed country of one of 12 different final processing ISIC industries, produced by a developing country, would replace an equal value (US$1 million at factor cost) of production in the developed economy. The question addressed was then: what is the effect of this replacement in the importing and exporting countries, respectively? The Lydall study takes into account not only the direct impact of the trade on producing sector employment but also the indirect employment effects by way of input-output analysis. These are the so-called “backward linkage” effects. These indirect effects naturally include the impact on the balance of other tradable goods. 28 26 Factors of production, labour, L, and capital, K, are treated separately, usually with fixed coefficients under the assumption that factor prices remain unchanged. 27 The “unit” has to be in common currency and this presents problems of its own. Previous studies have used the official or prevailing exchange rate to convert value added to a common currency, usually US$. 28 A recent study on the employment effects of changes in trade flows during the Great Recession (Kucera et al., 2010) finds that indirect employment effects may be about equal in size to the direct employment effects of a trade shock. 83
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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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NEW EVIDENCE ON TRADE AND EMPLOYMEN
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Region Annualized percentage change
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GENDER ASPECTS OF TRADE 5.1 INTRODU
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and income-earning opportunities ge
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A third view is that the type of jo
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REFERENCES Chapter 5: Gender aspect
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