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

Chapter 3: Assessing the impact of trade on employment: Methods of analysis
Box 3-5: Using input-output methods to compute trade-induced
changes in employment: a hypothetical example (Continued)
Note that when all prices are equal to one, trade is balanced in this example. Gross
output (X) would then be equal to
X = AX + Yd + E – M,
which can be solved
X = (I-A) -1 (Yd + E - M )
Here, I is the identity matrix, with ones on the diagonal and zero elsewhere. Computing
X can be done easily by way of Excel’s array functions. 29
Agriculture 93.3
Industry 87.7
Services 101.1
Source : Author’s calculations.
Total employment is then LX = 85.2.
On the basis of this exercise, a 1 per cent increase in imports in all sectors will lead
to an employment level of 84.94, a decline of 0.26, since total output contracts. A
1 percent increase in exports, instead, will increase employment by 0.27 as output
expands. Since trade was initially in balance, a 1 per cent change in both exports
and imports has no effect on the total gross value of production but does change its
structure.
The Leontief multiplier analysis emphasizes the need to count intermediate production,
both direct and indirect, in order to assess employment effects. It assumes that
wages are fixed and that the economy adjusts to changes in final demand, both in
aggregate and structure, through proportional adjustments in employment levels for
each sector. In this structuralist approach (see box 3-7), exports from sectors that
are more labour intensive, directly and indirectly, cause employment to rise faster.
The methodology can be easily extended to assess the impact of productivity increases,
which simply take the form of lower labour coefficients. If, however, lower employment
leads to lower wages, and if profit-maximizing firms respond by hiring more labour,
the linearity of the Leontief model is inappropriate and a more complex model is
required.
An approach similar to that summarized in box 3-5 has been applied in the
OECD (Baldwin, 1994) to assess employment changes following changes in trade
flows for eight industrialized countries. Table 3.2 reports the findings of the exercise.
Canada, as is seen, experienced a 2.38 per cent increase in employment from 1971
29 One can use the command: “=MMULT(MINVERSE(I-A),Yd+E-M)”, to compute X with I, A,
Yd, E and M all defined as ranges.
X
85