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

Chapter 3: Assessing the impact of trade on employment: Methods of analysis
through import penetration could be made up for, at least in part if not wholly, by
jobs gained in a range of other sectors. Baldwin notes that when applied to manufacturing
alone, the results are not as favourable in the above example. Canada,
France, the UK and the US all suffer a net decline in manufacturing employment
growth. The main point of this analysis, however, seems to echo the conventional
wisdom: trade in the long run has mostly a small but positive impact on national
employment growth.
3.3.3.2 Assessing input-output methods
As a result of the assumed linear production technology, input-output models are
relatively inexpensive and easy to formulate and run. They can be made dynamic
if investment, I, is first disaggregated from final demand, F, and then used to determine
the time path of the capital stock. 30 Still, input-output models lack an
internally consistent demand system and thus an endogenous balance of savings
and investment. Productivity-enhancing trade flows may well kick up this investment
in fully specified general equilibrium models, but for now that link is ignored. It
follows that one would expect a reduced impact of trade on employment when
using an input-output approach compared to partial equilibrium, but less than CGE
models.
The disadvantages of input-output analysis mostly derive from the implicit assumption
that factor content remains fixed over a long period of time and is therefore
impervious to changes in policy, tastes or indeed any other behavioural variables.
Moreover, the analysis takes the level of productivity as exogenously given, when a
number of studies have shown that productivity growth rises with trade, both imports
and exports.
As in partial equilibrium models, input-output does not track individuals to
find out what they do when they are displaced from their jobs. In the short run the
answer might be “nothing”. This answer is not, however, plausible when one takes
a longer historical view. In developing countries, the concentration of income due
to trade or any other force opens up new areas of consumer goods that might not
have been demanded in the past, or were seen as out of reach. In developing
countries, transition from an agrarian-based economy to one based on manufacturing
and ultimately services had to have begun with individuals “losing their jobs” in
agriculture. Nobody wants to be the one to make the first move but, as Chamley
(2004) notes in his work on rational herds, even penguins will push an unfortunate
colleague into icy, orca-infested waters to test whether it is safe for the rest of the
flock.
30 This is done by way of the stock-flow equation Κt = Κ t-1 (1–δ) + I, where δ is the depreciation rate.
Consistent forecasts of intermediate demand, foreign exchange requirements and associated employment,
for example, could then be made, contingent on a forecast for investment. The framework
just presented is the open Leontief model, but a closed version is available in which all elements of
final demand and value added are made dependent on gross output X. It was left to von Neumann
to show that a maximum rate of sustainable growth is well defined by the model.
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