Transcript CHAPTER 3:TRADE AND EMPLOYMENT

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
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3C: Labour market institutions shape
comparative advantages
• Labour market institutions affect employment levels and
factor prices …
• … hence contributing to specialisation (even in autarky),
comparative advantages and trade flows
• 3A and 3B:
minimum wage (Davis, 1998), turnover (DMM, 1999)
• Burgeoning literature, 3C:
Boulhol (2006, 2008), Helpman and Itskhoki (2007)
+ papers # 9 - 12
3C: Labour market regulation
and relocations
• Boulhol (2006, 2008)
Footlose capital model (Martin & Rogers, 1995) + segmented labour market
(McDonald & Solow, 1985)
Footloose capital model (economic geography)
2 x 2 x 2 , capital internationally mobile, labour
Footloose: even though capitalists can relocate their capital abroad, they spend
capital income domestically
Sector A: c.r.s., perfect competition, labour
Sector R: differentiated good, i.r.s. (fixed cost of capital), market power,
bargaining, higher wages
Unemployment
Rents in sector R create segmented labour markets as people searching for
high-paid jobs trade-off receiving unemployment benefits (instead of lowpaid jobs) against better chance to get a high-paid job
3C: Autarky (Boulhol, 2006, 2008)
• Labour market regulation
bp (  ): workers’ bargaining power
High bp: - workers capture a high share of the product market rents
- capital return is lower
- greater wage inequality between workers in the rent sector
and workers in the other sector
- high unemployment: more workers prefer to search for a
good job than work with low wage
3C: Unemployment and specialisation
u R  U /(U  LR )  f ( ) ,
f '0
L  L A  LR  U
u
U L  L A  LR L  L A U
 L 
 L 


 1  A  u R  1  A  f ( )
L
L
L L  LA 
L 
L 

• Unemployment decreases because either LM is
deregulated or economy specialises in non-rent sector
Opening the economy affects specialisation
3C: Open economy
• Capital liberalisation with a low LM-regulated
country
- capital moves abroad because capital return is higher
- relocations abroad of activities with high rents
- specialisation in low-rent sector (higher LM regulation
triggers more specialisation)
• Decrease in (iceberg) trade costs
- amplification of relocations because it becomes cheaper
to serve the domestic market from abroad
Symmetric countries in terms of size and trade costs: s  1 / 2 ,    *
Fig. 3a: Unemployment Rate in the Domestic Country
n
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Workers' bargaining pow er (gamma)
tau = 3
tau = 1.5
tau = 1.25
autarky
• In the open economy, the relation between LM regulation and the
unemployment rate is hump-shaped due to specialisation
• When trade costs are sufficiently low, unemployment disappears
because of full specialisation (all high-rent/high-wage activities have
been transferred abroad)
• A likely consequence is that trade liberalisation puts pressure on
labour market institutions, triggering LM deregulation
3C: Hiring costs and trade
• Helpman and Itskhoki (2007)
Mortensen-Pissarides-type frictions (hiring costs)
+ Melitz model
Impact of LM frictions on trade flows, productivity, unempl.
• 2-sector model
- differentiated-good sector monopolistic competition as in
Melitz: market power + hiring costs + bargaining
- homogenous good, c.r.s., perfect competition
3C: Helpman and Itskhoki
•
Two opposite effects of LM institutions (hiring costs)
Good institution means:
a) lower hiring costs (hence lower unemployment rate)
b) b) more resources are driven in the rent-sector (hence
higher unemployment rate)
Unemployment rate is hump-shaped in the quality of
LM institutions (even in autarky)
3C: Open economy
• Trade liberalisation
-
both countries gain from trade, but the country with lower frictions
gains proportoniately more
flexible country exports the differentiated good in net
improving LM institutions in one country raises its welfare; the
trading partner specialises in the homogenous good, unemployment
decreases, but welfare decreases (bad specialisation)
• Impact on unemployment depends critically on the fact
that trade impediments are higher in the sector with
higher LM frictions
(consequently, trade liberalisation induces an expansion of activity in
the sector with the higher rate of unemployment)
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
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3D: Empirical evidence
• Employment is negatively affected in import-competing
industries
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Tariffs cuts reduced employment in the industries that were the most
negatively affected by USA-Canada FTA by 15% and reduced
output and number of plants by 8%
-
against these large short-run adjustment costs, long-run labour
productivity gains of 17%, driven by contraction of low-productivity
plants (Trefler, 2001)
-
Contribution of trade with developing countries to deindustrialisation
in developed countries. Total job losses vs employment in services?
(Rowthorn, Ramaswany & Couts # 13, Boulhol & Fontagné, 2005)
3D: Adjustment costs
• Evidence that trade liberalization increases
unemployment in the short-run (Chile)
• Small adjustment costs associated with
transitional unemployment in developed
countries (Matusz & Tarr, 1999)
• Latin America:
trade liberalisation increases employment, left
unemployment (increased participation)
3D: Skill upgrading
• Japanese multinationals, 1965-1989 (Head &
Ries, 2000):
more employment in low-income countries is
associated with higher skill level of domestic
employment (vertical specialisation)
• Some evidence that trade leads to skill
upgrading and productivity gains within sectors
(France, UK)
3D: Foreign outsourcing
• Impact of offshore outsourcing on the wage share of non
production workers within manufacturing sectors
(Feenstra & Hanson, 1996):
-
No effect between 1972-1979
30% of hte decrease in this wage share between 1979-1990 is
explained by offshore outsourcing
• Outward FDI seems to be associated with an increase in
net exports: production in foreign and domestic affiliates
would complement to each other
• However, firm investment abroad seems to substitute to
domestic investment (but inward FDI has a net positive
effect of total investment)
3D: Trade and turnover
• What is the direction of causality ?
(Davidson and Matusz, 2005)
-
From trade to turnover (common view)
1) trade increases competition, drives firms out of business and threatens job security
(in the manuf. sector);
2) of course trade can have positive labour market outcomes in expanding sectors
In either case, trade creates or destroy jobs: more turnover
- From turnover to trade
« intrinsic » LM turnover has an impact on trade flows (DMM)
More turnover, higher wages to compensate workers, higher production costs, less
competitve, more imports
• Davidson and Matusz find strong evidence of correlation between
rates of job losses and level of net exports, evidence of channel
« from turnover to trade »