Leverhulme Globalisation Lecture,
University of Nottingham, 28 November 2005
Compensating Trade-Displaced Workers:
A mountain or a molehill?
by
1
John P. Martin
Director for Employment, Labour and
Social Affairs, OECD
Outline of talk

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2

The Issues
Trade and OECD labour markets: the
context
Trade adjustment costs: the policy
challenges
Policy responses
I. The Issues

An old story: trade liberalisation creates
winners and losers

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3

Potential Pareto improvement if welfare gains
exceed losses; actual Pareto improvement if the
losers are compensated.
But compensation often does not occur (or only
partially)
Why not?
What might be desirable elements in a
compensation strategy?
II. The Current Context
Why so much concern now about
globalisation and labour markets?

Rising imports of manufactured goods

FDI in low-wage countries

“Offshoring” of business services

4
- Chinese textiles today, but this is a long-running
saga
- Again, not a new story
- High-skilled, white-collar workers are also at risk
now, as well as low-skilled blue-collars
Integration of China, India into the world
trading system
- Huge reservoirs of under-employed labour
- Spectre of a “race to the bottom”
What does the evidence say?

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5
About the nature of international
competition facing OECD workers
About the impact of international
competition on how OECD workers
fare
International competition is real

International economic integration has
increased dramatically
- Trade flows have risen relative to GDP
- FDI has also grown rapidly
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6
And, it does threaten some jobs
- Employment losses are observed in the industries
facing the most intense international competition
- International wage differentials are very large
7
Luxembourg
Ireland
Czech Republic
Slovak Republic
Belgium
Hungary
Netherlands
Austria
Denmark
Switzerland
Sweden
Korea
Portugal
1970-1974
Canada
Turkey
Iceland
Finland
Norway
Mexico
Germany
Poland
New Zealand
Spain
United Kingdom
Italy
France
Greece
Australia
United States
Japan
STYLISED FACTS
1. Trade openness has increased in recent decades
(“Openness” = exports plus imports of good and services as a
proportion of domestic production)
2000-2004
300
250
200
150
100
50
0
STYLISED FACTS (cont.)
2. FDI « openness » has also increased
Sum of inward and outward international direct investment positions as a percentage of GDP, 1990 and 2002 c
1990
2002
180
160
140
120
100
80
60
40
20
8
Source: OECD Economic Outlook , National Accounts and Foreign Direct Investment databases.
Ireland
Netherlands
Switzerland
Sweden
United Kingdom
Denmark
Canada
Finland
Spain
France
Hungary
Portugal
New Zealand
Germany
Australia
Norway
Czech Republic
Austria
Slovak Republic
United States
Poland
Italy
Iceland
Greece
Japan
0
STYLISED FACTS (cont.)
3. Higher international competition is associated with
lower employment growth at the industry level
(annual percentage growth rate, 1980-2000)
High-international-competition manufacturing
Total manufacturing
20
10
0
-10
-20
-30
-40
-50
Spain
Portugal
Canada
United States
Sweden
Australia
Belgium
Italy
Japan
Norway
Austria
Denmark
France
Finland
United Kingdom
9
-60
Mexico
Brazil
Source: U.S. Bureau of Labor Statistics.
Norway
Denmark
Germany
Switzerland
Belgium
Netherlands
United States
Austria
Sweden
EU-15
Luxembourg
Japan
United Kingdom
France
Canada
Australia
OECD
Ireland
Italy
Spain
Israel
Korea
New Zealand
Portugal
Czech Republic
10
China
India
STYLISED FACTS (cont.)
4. Wage costs are far lower in the largest developing countries
than in most OECD countries, 2002
[Costs = US$ at market exchange rates]
30
25
20
15
10
5
0
Important offsetting factors
are often overlooked
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Trade also generates jobs via
exports
“Offshoring” is not so threatening
Trade has been a major driver of
rising productivity and living
standards
The magnitude of trade-related
adjustment costs: some evidence

Gains from trade imply labour reallocation
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But so do technological shocks, demographic
shocks, etc.
Labour reallocation implies displaced workers
Need to balance compensation of displaced
workers for their losses with adjustment
from declining to expanding sectors
Manufacturing workers are displaced more often than
service workers, but evidence for a direct link
between trade and job loss rates is mixed:
Annual displacement rates
Canada
1983-1999
Manufacturing
6.5
3.7
10.7
8.3
5.9
5.9
3.7
4.5
3.5
13.7
14.4
10.0
4.5
6.7
3.2
2.8
3.9
5.1
High-international-competition
Medium-international-competition
Low-international-competition
Services and utilities
Total employment
13
14 European
United States
countries 1994-2001 1979-1999
Industry
The annual displacement rate is the share of workers experiencing a permanent, involuntary layoff
during the year.
Trade-displaced workers tend to be older,
higher tenure, production workers:
all characteristics associated with greater adjustment difficulties
The United States, 1979-1999
Services
14 European countries, 1994-2001
All manufacturing
High-import-competition manufacturing
Ages 55-64
Job tenure
>= 10 years
Women
Blue collar
14
Low
education
%
80
60
40
20
0
0
20
40
60
%
80
Trade-displaced workers bear adjustment costs:
wage cuts are an important source of earnings losses in the US,
while long-term joblessness plays a more important role in the EU
The United States, 1979-1999
Services
14 European countries, 1994-2001
All manufacturing
High-import-competition manufacturing
Share of reemployed
Mean
change in
log wage
(x100)
Share with
earnings
loss >30%
15
%
80
60
40
20
0
-20
-20
0
20
40
60
%
80
Rationales for Compensation/
Adjustment Assistance

3 rationales for policy intervention
- Efficiency: Output is lower due to involuntary
unemployment of trade-displaced workers; capital
reallocation takes time
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- Equity: Unfair that a minority of workers should
lose from a policy that increases overall income
(Corden’s “Conservative Social Welfare Function”)
- Political economy: Political support for international
economic integration presupposes adequate help for
workers who are hurt
Do these rationales create a strong case for
compensating trade-displaced workers?

First answer on both efficiency and equity
grounds:
No to a specific trade-related programme; Yes to a
programme for all permanently displaced workers.
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But there could be an exception on politicaleconomy grounds, as in U.S.
What would a good compensation/adjustment
scheme consist of for displaced workers?
Need:
 Macroeconomic policies conducive to sustained
growth and high employment.
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
Flexible labour and product markets
An effective package of UI/active labour
market policies (ALMPs)
Effective lifelong learning polices
Elements of an effective UI/ALMPs package
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Set replacement rates at reasonable levels and avoid
open-ended duration of benefits
Basic job-search services available to all job losers
- Counselling/developing an individual plan
- The advantage of an early start (advance notification of plant
closures)
- Be alert to indirect victims (e.g. long-term unemployed in a
heavily impacted local labour market)
Monitor effectively the job-search activity of jobseekers
The watch words are “activation/mutual obligations”
This can involve sanctions if individual job seekers do
not live up to their side of the bargain
-
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Take steps to make work pay
Among the range of ALMPs, make much greater use
of those that work and phase out those that don’t
Need more rigorous evaluations, especially in Europe
Would it be useful to invest in wage insurance
schemes for permanently displaced workers?

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Wage insurance:
- Compensates for (part of) the wage losses on the new job (e.g.
50% of the difference in pay between the old and new jobs)
- Recently introduced in France, Germany and the United States
Unfortunately, no good evaluation evidence on whether wage
insurance is a cost-effective instrument.
- Serious design and implementation problems to be overcome.
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Puzzle: Is wage insurance pertinent for European labour
markets, where large wage cuts following re-employment are so
rare? Maybe more so for the US?
How do current and proposed compensation/
adjustment schemes for trade-displaced
workers shape up?
1.
TAA in the United States
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Very long-standing; has been on the go since early
1960s.
Has gone through many changes, most recently in
2002 when health care benefit, wage insurance
component were added
Procedures for certification under TAA very long
and arbitrary
Not many workers get extended UI benefits or reemployment services
Main purpose is extended UI; political sop to freer
trade
How do current and proposed
compensation/adjustment schemes for tradedisplaced workers shape up? (cont.)
2. Proposed EU Globalisation Adjustment Fund (GAF)
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Proposal made recently by EU Commission
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aim is « to soften the negative impact of globalisation on
laid-off workers and to improve their chances of finding
new and better jobs by providing money for training and
relocation ».
Proposal extremely sketchy but it seems to imply
« adjustment » rather than « compensation ».
Motivation is a political-economy one
Supported by Britain and France, but opposed by
Germany, Sweden and some others.
Not obvious that this is most needed for EU
rather than more adaptable labour and product
markets.
EU Countries spend a lot on UI/ALMPs unlike the US(1)
Total UI
spending
Millions of Euro
1 416
3 098
2 899
6 234
131
221
3 259
5 017
1 307
3 003
16 911
27 540
24 304
49 244
..
631
1 582
1 231
..
8 003
876
8 427
..
1 863
31 350
1 670
85
93
5 326
11 002
464
3 261
8 288
5 819
Total ALMP spending
Austria
Belgium
Czech Rep.
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Netherlands
Poland
Portugal
Slovak Rep.
Spain
Sweden
United Kingdom
Total
107 190
136 357
Total UI
spending
As a percentage of GDP
0.63
1.37
1.24
2.51
0.17
0.28
1.74
2.68
0.91
2.09
1.09
1.77
1.14
2.31
..
0.41
1.17
0.91
..
0.62
1.83
1.86
..
1.08
0.67
1.28
0.29
0.32
0.72
1.48
1.29
1.22
0.53
0.37
Total ALMP spending
1.12
1. Data refer to 2003
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Memorandum items
Spending on TAA, 2003: USD 0.7 bill.
Spending on UI benefits in the US, 2003: USD 41 bill.
Spending on UI measures as % of U.S., GDP, 2003-04: 0.37
Spending on ALMPs measures as % of U.S., GDP, 2003-04: 0.16
1.42
Concluding thoughts

The labour-market policy challenge from globalisation
is real, but manageable
- The goal: helping trade-displaced workers to re-integrate into
productive employment
- The means: a balanced package of largely familiar policies (e.g.
good macro policy, flexible labour and product markets,
effective activation of the unemployed via a package of
UI/ALMPs/monitoring job-seeker behaviour/making work pay
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Little justification for policies that explicitly target
trade-displaced workers except on political economy
grounds
- This seems more pertinent for the U.S. context then for
Europe.
Bottom line:
Europe needs to cut high and persistent
unemployment in the major member states

There are effective remedies, but how to mobilise
the political will to implement them?
 Don’t make globalisation a scapegoat

The US should invest more in an expanded
25 and more effective TAA in order to maintain
the political economy case for trade
liberalisation.
