CHAPTER 2:TRADE AND WAGES
2A: Standard trade theory
2B: Empirical evidence
2C: Outsourcing and wages
2D: More recent advances
Globalisation and labour markets, H. Boulhol
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2C: Great unbundlings (Baldwin)
• International integration has reduced the
importance of geographic proximity between:
- consumers and producers (unbundling type I)
- suppliers of intermediates and final good
producers (unbundling type II)
• Relocations of production across distance and
borders are easiers
• More specialisation in production
2C: Great unbundlings (continued)
Globalisation might imply that changes in the
labour markets are not monotonously related to
education or skills, but rather to the extent to
which activities can be unbundled
That is, globalisation might be consistent with the
polarisation discussed in 2B
See trade in tasks (Paper 3: Grossman and RossiHansberg, 2008)
2C: Trade in intermediates
(Feenstra, chapter 4)
• Trade in intermediate inputs (combined with international
capital mobility) can affect production and factor prices
very differently than trade in final goods
• How?
As intermediates are used across industries, a change in
the price of intermediate inputs has an effect within
industries: trade affect labour demand within industries
2C: Semantics
• Phenomenon
- geographical separation of activities involved in
producing a good across several countries
- Improved communication and lower tariffs have allowed
firms to fragment their operation, moving less-skilled
labour intensive stages of production to countries where
low-skilled wages are low (transfer of production)
• Terminology
Trade in intermediate inputs / outsourcing / delocalisation /
fragmentation/ vertical specialisation / slicing the value
chain / production sharing / offshoring
2C: Feenstra and Hanson (1996, 2003)
• Structure of the model:
2 intermediates y1 low-skilled intensive
y2 high-skilled intensive
Continuum of final goods (bundles of y1 x y2)
each industry combines activities of various factor
intensities
Context: USA / Mexico trade + maquiladoras
Trade with Mexico is associated with a fall in p1/p2
2C: Outsourcing in Feenstra & Hanson
• Accumulation in South generates:
- Fall in low-skilled intensive imported intermediate input
prices in North
- Decrease in the relative wage of low-skilled labour
- Increase in demand for and in the relative wage of
skilled-labour in both countries
TRADE CAN WORSEN THOSE THAT ARE THE LEAST WELL
OFF IN A POOR COUNTRY
Effects are similar to SBTC
2C: Outsourcing (continued)
• Intuition of the mechanism at work:
- goods at the boundary of those produced in the USA and
Mexico are the most skilled incentives goods in Mexico
and simultaneously the least skilled incentive ones in the
USA
- at the margin, expansion of outsourcing displaces
activities that are the least skilled intensive in the USA
and the most skilled incentives ones in Mexico
2C: Outsourcing (end)
• Empirical analysis:
- outsourcing has an impact on inequality of a similar
order of magnitude than the development of computers
(proxy for SBTC),
- but results are sensitive to how computer use is
measured
(share of capital stock vs share of new investment)
2D: More recent advances
• Yeaple (2005)
• Milanovic and Squire (2005)
• Egger and Kreickemeier (2008)
2D: Yeaple (2005)
• Starting points:
- not all firms participate in export markets
- exporters tend to be larger, use more advanced
technologies and pay higher wages
- exporters tend to be more productive
2D: Yeaple (continued)
• Insight
- firms are intrinsically homogenous
- heterogenity of workers combined with competing
technologies, international trade costs give rise to firm
heterogeneity
• Setting
- 2 different technologies co-exist with different unit cost;
low unit cost (i.e. newer) technology requires fixed cost
- skilled workers have absolute advantge in both, but
comparative advantage in the low unit cost technology
- trade costs: fixed cost + iceberg transport cost
2D: Yeaple (end)
• Mechanisms
-
Given the fixed cost of trade, only firms that use the low unit cost
technolgy enter the export market, thereby selling large quantity
Firms endogenously choose to employ different technologies and
hire different type of workers
• Implications
-
Exporters are larger, use more advanced techn., pay higher wages
Reduction in transport cost increases the incentive for firms to adopt
the newer technology
Skilled workers are reallocated from the old technology to the new
Low-skilled workers leave the industry for employment elsewhere
Trade between identical countries raises relative demand for skilled
workers
2D: Milanovic and Squire
• Objectives
- New empirical investigation of the relationship
between globalisation and inequality
- What happens to countries non participating in
globalisation?
- Does globalisation affect countries that do not
change their trade policies?
2D: Milanovic and Squire (continued)
• Findings
- Global expansion of trade reduces the export volumes or
prices of non-globalising countries
- In addition to non participating in the benefits of
globalisation, non-globalising countries see a
deterioration in their positions compared with preglobalisation era
- Liberalisation efforts between other countries matter
- Relative trade liberalisation is important
2D: Egger and Kreickemeier (2008)
• Starting points
- Increase in inequality within groups account for 2/3 of increase in total
inequality
- Increase in within group inequality seems to be related with increase
in intermediate goods trade
• Features
- Inequality along 3 dimensions: between groups (entrepreneurs vs
wokers) and within groups (entrepreneurs and workers)
- Firm heterogeneity results from heterogeneous abilities of
entrepreneurs
- Fair wage-effort
• Main results:
TRADE INCREASES INEQUALITY, IN ALL DIMENSIONS,
AND AGGREGATE UNEMPLOYMENT