CHAPTER 3:TRADE AND EMPLOYMENT
3A: Wage rigidities
3B: Imperfect labour mobility, labour turnover,
efficiency wages
3C: Labour market institutions, comparative
advantages and unemployment
3D: Empirical evidence
Globalisation and labour markets, H. Boulhol
1
1
3A: Context
• Trade can affect:
-
average real wage
relative wages
total employment
relative employment
• However, trade theory traditionally assumes “fixed amount of
labour endowments” (stable unemployment). Why?
-
-
dichotomy between macro and micro issues: idea is that trade is a micro
issue, whereas as unemployment is determined by cycles, and macro and
structural policies
unemployment micro-foundations are recent
few empirical evidence on employment effects of trade policies
3A: General idea
• Through specialisation, trade influences relative employment
• It takes time for labour to relocate from contracting to
expanding sectors
• Due to imperfect labour mobility across sectors in the short
term, unemployment might rise
• In the medium / long term, resources are re-allocated, and
unemployment returns to its “natural” level
BUT TRADE CAN AFFECT STRUCTURAL UNEMPLOYMENT
3A: Endogenous comparative advantage
• Countries differ a lot in terms of:
-
Employment protection
Union coverage
Minimum wage
Labour turnover
Wage rigidities
Social insurance
• Labour market institutions may shape the pattern of
trade, have an impact on the effect of trade itself on
wages and employment
3A: The big question
• Do the classical results of trade theory
(overall gains from trade, distributional effects: SS)
extend to models with unemployment?
3A: Sources / formalisation of
unemployment
• Matching frictions (search-based models emphasise
transactions costs encountered by unemployed workers and
firms with vacancies that seek each other out)
• Monitoring or motivational concerns (efficiency-wage models
emphasise informational asymmetries )
• Sticky wages (minimum wage models emphasise wage
rigidities that prevent the labour market from clearing)
3A: Stylised framework
with minimum wage
• Original work by Brecher (1974)
• Double magnification:
- labour market distortion introduced by wage rigidities amplify
the specialisation of rich countries
- trade amplifies the effects of LM imperfections
• Induced over-specialisation is symptomatic,
increases unemployment and depresses demand
• Krugman (1995) offers a simplified presentation of
the mechanisms at work
3A: Krugman (1995)
• Purpose:
Effects of trade with developing countries on developed
(OECD) countries
• Effects depend on the structure of the OECD
country’s labour market:
- flexible wage country: wage distribution effect
(Stolper-Samuelson)
- rigid wage country: variable of adjustment is
employment (of less skilled workers)
3A: Structure of the model
U = U (C1, C2)
Q1 = F (Ls1, Lu1) skill intensive good
Q2 = F (Ls2, Lu2) less-skill intensive good
Perfect competition, c.r.s.
X1 = Q1 –C1
M2 = C2 – Q2
3A: “European” approach
Rigid wages: Ws / Wu is fixed
Implications
- Ls / Lu is fixed in each sector
- p1 / p2 is fixed (as long as both goods are still
produced with trade)
3A: “European” approach
Rigid wages: Ws / Wu is fixed
Implications
- Ls / Lu is fixed in each sector
- p1 / p2 is fixed (as long as both goods are still produced
with trade)
Effects of trade with developing countries
fall in relative demand for less-skill intensive good
fixed Ws / Wu implies decrease in less-skill employment
(weight of sector 1 increases, weight of sector 2
decreases at constant Ls / Lu within each sector)
3A: Aggregate gains from trade ?
• Two opposite effects:
-
usual gains from comparative advantage (at full / unchanged
unemployment)
increase in low-skill unemployment
• Do these employment effects become much larger as
industrialisation spreads in developing countries?
-
skill upgrading with development
limits to Factor Price Equalisation: full FPE applies only when there is no
full specialisation
When the change in relative prices is so large that the OECD no longer produce the
import competing good, any further reduction in the relative price of low-skill
intensive good has no effect on income distribution
3A: Davis (1998)
• North / North trade
• “flex-wage” USA vs “rigid-wage” Europe
• Wage rigidities affect comparative advantages
(see paper’s presentation)
Davis (1998), Figure1
16
REFERENCES
Marché du travail
Cahuc, P., Zielberberg, A., 2001. Le marché du travail, De Boeck eds., 1ère édition, Chapitres 4, 5 & 7.
Pissarides, C.A., 2000. Equilibrium Unemployment Theory, chapter 1.
Chapitre 3
Davidson, C., Matusz, S.J., 2004. International Trade and Labor Markets, W.E. Upjohn Institute for
Employment Research Kalamazoo, Michigan, Chapters 1-3.
3A
Davis, D.R., 1998. Does European Unemployment Prop Up American Wages? National Labor Markets
and Global Trade. American Economic Review, 88 (3), 478-494.
Krugman, P.R., 1995. Growing World Trade : Causes and Consequences, Brookings Papers on Economic
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3B
Davidson, C., Martin, L., Matusz, S.J., 1999. JIE 48, 271-299.
Davis, D.R., Harrigan, J., 2007. NBER WP 13139.
Krugman, P.R., Obstfeld, M., 200?. International Economics, Chapter 3, FIFTH
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EDITION, Pearson
3C
Boulhol, H., 2008. Do capital and trade liberalization trigger labour market deregulation?, Journal of
International Economics, forthcoming. http://team.univ-paris1.fr/teamperso/boulhol/dt/interactionJIE.pdf
Boulhol, H., 2006. original working paper version with more detail about unemployment ftp://mse.univparis1.fr/pub/mse/cahiers2006/Bla06062.pdf
Egger, H., Kreickemeier, U., 2007. CESIfo WP 2000, forthcoming Intenrnational Economic Review.
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http://eswm2006.carloalberto.org/files/Janiak-paper.pdf
Helpman, E., Itskhoki, O., 2007. NBER WP 13365.
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3D
Feenstra, R.C., Hanson, 1996. Globalization, Outsourcing, and Wage Inequality, American Economic
Review, vol. 86, issue 2, pages 240-45.
Hoekman, B., Winters, L.A., 2005. Trade and Employment: Stylized Facts and Research Findings, World
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