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
1
2A: Stylised facts
• Increase in inequality between low-skilled and highskilled workers in developed countries since the 1970s:
- wage inequality in Anglo-saxon countries
- employment inequality in some European countries
• Labour market institutions might explain the different
outcomes across countries (Chapter 3)
• Downward trends in the labour share (in value added)
• These facts are qualitatively consistent with standard
trade theory. Quantitatively ? (2B)
2
2A: Standard trade theory
• Comparative advantages arise from
-
technological differences (Ricardian model)
factor endowment differences (HOS)
• Both matter in the real world (but insufficient to explain
patterns of trade)
• Long-term outcomes of trade
•
Short-term impact and adjustment towards long-term
equilibrium (chapter 5)
3
2A: Heckscher-Ohlin-Samuelson model
• 2 x 2 x 2 model, capital & labour, common technology
 Yi  f i ( K i , L i ) , i  1, 2 c.r.s. ,
K1  K 2  K
L1  L2  L
 factors are mobile across sectors, immobile across countries
 Assumption: sector 1 is labour intensive
 (w, r ) , L1 / K1  L2 / K 2
 free entry under perfect competition: pi  ci (w, r )
c i ( w, r ) : minimum cost of producing one unit of output (unit-cost )
= marginal cost = average cost per unit of output
4
2A: Factors shares in output / total costs
Notations:
a iL optimal choice of L to produce one unit of good i
a iK optimal choice of K to produce one unit of good i
c.r.s.  aiL  Li / Yi , aiK  K i / Yi
ci (w, r )  w aiL (w, r )  r aiK (w, r )
 iL 
wLi w a iL

p i Yi
ci
,  iK 
rK i r a iK

 1   iL
p i Yi
ci
L1 / K1  L2 / K 2  a1L / a1K  a 2 L / a 2 K
 1L   2 L  1K   2 K
5
2A: Jones (1965)’ algebra
pi  w aiL  r aiK
 dpi  aiL dw  aiK dr

pˆ i   iL wˆ   iK rˆ

wˆ 
(envelope theorem)
i  1, 2
 2 K pˆ 1  1K pˆ 2
1K
 pˆ 1 
( pˆ 1  pˆ 2 )
 2 K  1K
 2 K  1K
 pˆ   pˆ
 2L
rˆ  1L 2 2 L 1  pˆ 2 
( pˆ 1  pˆ 2 )
1L   2 L
1L   2 L
6
2A: Trade and convergence
of relative factor prices
Source: Krugman and Obstfeld, chapter 4
7
2A: Trade and convergence
of relative factor prices
Total integration ensure factor price equalisation
(FPE) …
… provided that both goods are still produced
in each country
8
2A: Magnification effect of trade
If domestic country is labour intensive
Trade implies that pˆ 1  pˆ 2
and therefore wˆ  pˆ 1  pˆ 2  rˆ
9
2A: Stolper-Samuelson theorem
• One of the central results of Heckscher-Ohlin theory
• What is the effect of changes in the prices of goods,
caused for example by changes in tariffs or subsidies, on
the prices of factor of production?
• Unambiguous answer:
An increase in the relative price of a good will increase
the real return to the factor used intensively in that
good, and reduce the real return to the other factor
10
2A: Intuition (Neary)
•
•
•
-
-
One sector produces exports, the other sector competes with imports
Suppose the import-competing sector is labour-intensive: it uses a
higher ratio of labour to capital
What is the effect of a tariff or some other change which raises the price of
the import-competing good?
this will encourage the import-competing sector to expand
with full employment of both factors, this expansion must come at the
expense of the export sector
expansion of the labour-intensive sector and contraction of the capitalintensive one raise the aggregate demand of labour relative to capital:
upward pressure on wage
at unchanged export prices, a higher wage implies a lower capital return
the wage must then rise even more than the import price
wage-earners gain and capital-owners lose: trade policy generates a
distributional conflict
11
2A: Stolper-Samuelson theorem
• A country that is relatively abundant in labour
specialises in the labour-intensive good. In that
country, the real wage increases and the real
return to capital decreases. It is the opposite for
the country that is relatively abundant in capital
• Low-skilled labour and high-skilled labour
• Distributional consequences: gainers and losers
from increased trade opportunities
12
2A: Graphical representation of SS theorem
Source: Feenstra, chapter 1
13
2A: Gainers, losers,
and total gains from trade
• Debate arises when distributional effects of trade
imply an increase in inequalities
• We tend to hear more about losers than gainers:
-
Losers from trade are typically concentrated in some sectors, while
a vas majority benefits, at least in theory, from lower import prices
Losers are therefore better organised
• Aggregate gains from trade: both gains and
pains are commensurate with each other to a
certain extent
The larger the differences in endowments between countries, the larger
the total gains, and the dearer the pains for the losers
14
2A: Gainers, losers,
and total gains from trade (continued)
• In theory, overall gains from trade means that losers can
be compensated, such that ex post everybody gains
• In practice:
- difficult to identify the losers (from trade)
- Difficult to find the political support to compensate them
- The impact of globalisation on tax competition reduces
the scope of governments’ tax policies (see chapter 5)
15
2A: Limitations
• Many goods, many factors (Feenstra, chap. 3)
A version of SS continues to hold, though not quite as strong as the 2
sector by 2 factor case
• Imperfect mobility of a factor between sectors
(specific factor model, see chapter 5)
effect on the real return of the mobile factor is ambiguous
• Total specialisation: non-competing imports
what matters is the relation between factor prices and the prices of goods
produced domestically (binding zero profit conditions): the price of noncompeting goods matter only for CPI, not for the wages paid by producers.
FPE works if differences in (relative) factor endowments are not too large
16
2A: Limitations (continued)
• More than 2 countries
“local” rather than global factor abundance matters, i.e.
compare a country’s factor abundance to others’ that
produce the same set of goods
(Milanovic and Squire,2005; 2D)
• Trade in intermediate inputs (outsourcing)
Chapter 2C
Paper 3: Grossman and Rossi-Hansberg (2008)
17
References
2A
Feenstra, R.C., 2003. Advanced International Trade: Theory and Evidence. Princeton
University Press. Chapters 1 & 3
Krugman, P.R., Obstfeld, M., 2008. International Economics, Chapter 6, Eighth edition, Pearson eds.
Neary, P., 2001. Competition, trade and wages,
http://www.economics.ox.ac.uk/members/peter.neary/papers/pdf/intea.pdf
2B
Autor, D.H., Katz, L.F., Kearney, M.S., 2006. The Polarization of the U.S. Labor Market, American
Economic Review 96 (2).
Autor, D.H., Katz, L.F., Kearney, M.S., 2008. Trends in U.S. Wage Inequality: Reassessing the
Revisionists, review of Economics and Statistics, May.
Borjas, G.J., Ramey, V.A., 1995. Foreign Competition, Market Power and Wage Inequality. Quarterly
Journal of Economics, November, 1075-1110.
Blum, B.S., 2008. Trade, technology, and the rise of the service sector: The effects on US wage
inequality, Journal of International Economics 74 (2), 441-458.
Dinopoulos, E., Segerstrom, P., 1999. A Schumpeterian Model of Protection and Relative Wages,
American Economic Review 89 (3).
Dustmann, C., Ludsteck, J., Schönberg, U., 2007. Revisiting the German Wage Structure, IZA
Discussion Paper 2685.
Feenstra, R.C., Hanson, G.H., 2003. Global Production Sharing and Rising Wage Inequality : A
18
Survey of Trade and Wages, Handbook of International Trade.
Goldberg, P.K., Pavcnik, N., 2007. Distributional Effects of Globalization in Developing
Countries, Journal of Economic Literature, Vol. XLV, 39-82.
Harrison, A., 2008. Globalization and Poverty
Journal of International Economics, 2001. Special issues: Trade and Wages, 54 (1).
Journal of International Economics, 2000, 50 (1).
Lemieux, T., 2007. The Changing Nature of Wage Inequality, NBER Working paper 13523.
Thoenig, M., Verdier, T., 2003. A Theory of Defensive Skill-Biased Innovation and Globalization,
American Economic Review, 93 (3), 709-728.
2C
Feenstra, R.C., 2003. Advanced International Trade: Theory and Evidence. Princeton
University Press. Chapter 4.
Feenstra, R.C., Hanson, 1996. Globalization, Outsourcing, and Wage Inequality, American
Economic Review, vol. 86, issue 2, pages 240-45.
Grossman, G.M., Rossi-Hansberg, E., 2008. Trading Tasks: A Simple Theory of Offshoring,
American Economic Review, 98 (5), 1978-1997.
2D
Amiti, M., Davis, D.R., 2008. Trade, Firms, and Wages: Theory and Evidence, CEPR Discussion
Paper No 6872.
Egger, H., Kreickemeier, U., 2008. CESIfo WP 2344.
Milanovic, B., Squire, L., 2005. NBER 11046
Yeaple, S., 2005. A simple model of firm heterogeneity, international trade, and wages, Journal
19
of International Economics 65, 1-20.