Transcript Debate on Competitiveness and Globalization

Topics in the Globalisation Debate 2:
Labour Markets
This lecture draws, among other sources, from:
Rodrik (1997): Has globalisation Gone too Far? Institute for International Economics.
Wolf (2004): Why globalisation Works? Yale University Press
Haaparanta (2007): Reilu kauppa, kysyntä, tarjonta ja tasapaino: Kuka kaiken maksaa?
Globalisation and
Rich Countries’ Labour Markets
• See Lecture 4 for discussion in the context of HO-model.
• Rodrik (1997): Open economies are more responsive to changes
in prices, including wages
→ Costs of improved working conditions cannot be shared
employers as easily as before (see previous slide)
→ Increased volatility of wages and/or employment
→ Decrease in labour’s bargaining power
with
→ There are basis to argue that globalisation will have an
adverse impact on capital-abundant countries low-skilled
workers
•
However, since the aggregate gain from free trade is larger than the
aggregate loss, it is possible to compensate the losers and achieve a Pareto
improvement. This might also explain the welfare states of some small, open
economies.
Dani Rodrik (1997): Has globalisation Gone too Far? Available at Institute for International Economics website.
Rodrik: Shift and Increased Elasticity
of Labour Demand
• Autarky → Free trade and
capital flows
• (1) Demand for labour
shifts inward in capitalabundant countries
• and (2) the demand curve
becomes more elastic
capital-abundant country
wage
SL
(2)
(1)
wA
pFT
(change in wage rate creates now larger
impact on quantity of employment, i.e.
production can be moved abroad)
Dani Rodrik (1997): Has globalisation Gone too Far?
Available at Institute for International Economics website.
DLFT
DLA
QLFT QLA employment
Elasticity of Labour Demand and
Imposing Labour Standards
S’L
• Assume that higher labour wage
standards are imposed (creates
a new cost) → supply curve
shifts upward → wages
decrease, employment
decreases
• The more elastic the demand
the more employment
decreases, wages decrease and
the larger share of the cost is
paid by employees
SL
E
W
DLFT
employment
E = employers share of the cost
W = worker’s share
Changes in Wage Structure
•
Between 1979 and 1995 real wages of full-time working high-school
dropouts declined by 20% and the real wage of college graduates increased
by 3% (Katz & Author, 1999). The major candidates for explanation are:
o
o
Skill-biased technological change
Increase in international trade
• “Most of literature”: trade has not played a major role because
o
o
o
the amount of trade is too small
prices of (final) goods have not changed consistently
employment between industries has not changed
consistently
See Feenstra & Hanson (2003), Katz & Author (Handbook of Labor Economics, 1999) for
discussion.
Change in the U.S. Real Wages
(per percentile between 1970 and 2002 )
Source: Smith (2006)
Outsourcing
• Feenstra & Hanson (2003)
o Previous research has misread the data by comparing
whole industries with each other
o In fact, a large amount of trade is in intermediate
inputs (outsourcing), which occur inside the industries
o This can have a much larger effect on wages than trade
in final goods
• F&H: “outsourcing can account for half or more of
the observed skill upgrading”
• F&H: “Existing literature has just begun to scratch the
surface”
Globalisation and
Poor Countries’ Labour Markets
• “Hopefully, there is presently no actual concentration
camps anywhere. Instead […] some sort of labour
camps seem to have become an essential part of our
time”
Ville Päivänsalo (referring to working conditions in the developing
world) in Helsingin Sanomat, opinion pages, 31 October 2004
• “China’s rapid growth over the past two decades has
delivered more people from desperate poverty, more
quickly, than ever before. This does not suggest
exploitation. Moreover [those] who have fled rural
China to work in factories […] were not forced to do
so by anything other than their poverty at home”
Martin Wolf (2004, 185) in Why globalisation Works?
Impact of globalisation on Poor
Countries’ Labour Markets
• Globalisation critics
o developing world workers are not able to bargain
efficiently and are thus exploited → rich
countries should impose universal minimum
standards (wages, working conditions etc.)
• Mainstream economists
o trade and FDI increase the demand for labour
(and productivity) in the developing world →
labour markets become “tighter”* → wages and
working conditions improve
* One way to understand “tighter” is that there are more opportunities employees can choose
from. In other words, their “outside option” increases, which increases their bargaining power.
Imposing Minimum Standards to the
Developing World (1)
• Assume a developing country with most of the labour force
employed in unproductive agriculture
→ wages are set in agriculture (opportunity cost of not working in
modern sector) → wages in modern sector are less than labour’s
marginal product
→ (1) capital owners make very large profits
→ (2) more labour flows to the modern sector
→ less supply of labour in the agriculture → higher wages in
agriculture → higher wages in the modern sector (i.e. the overall
wages increase)
Martin Wolf (2004, 186): Why globalisation Works? Yale University Press
Imposing Minimum Standards to the
Developing World (2)
Assume, now, that the labour in modern sector is
paid their marginal product
•
→ (1) capital owners make normal profits
→ (2) no/less labour flows to the modern sector
→ dual labour markets


•
low incomes to the majority in agriculture
high incomes for the few in modern sector
“Indian workers are so well protected from exploitation by
industrial bosses that they have no jobs at all. The exact
opposite happened in South Korea and Taiwan”
Martin Wolf (2004, 187): Why globalisation Works? Yale University Press
Wages, productivity and unit labour cost
Stephen Golub (1998): Does Trade with Low-Wage Countries Hurt American Workers? Fed of
Philadelphia Business Review March/April 1998
The FAIRTRADE Mark
• Certification system that demand traders to
o pay a price to producers that covers the costs of
sustainable production and living and a premium
that producers can invest in development
• Minimum price system
o a guaranteed price that covers the cost of
production and ensures a living wage for
growers
o rises in line with market prices if they rise above
the minimum Fairtrade price
Source: http://www.fairtrade.org.uk/
Impact of FAIRTRADE:
Overproduction and Quotas
price
• FAIRTRADE provides a
minimum price pFTr, which is
above the world equilibrium
price p0
• Given this price, supply is
larger than demand
• To avoid this, quotas are
allocated to producers
• e.g. Valkila (2007) surveys
Nicaraguan FAIRTRADE
coffee farmers and finds that
they sell only 30% of their
D
production to the FTr
system (and rest to the
Quantity
regular world market)
S0
pFTr
p0
Haaparanta (2007): Reilu kauppa, kysyntä, tarjonta ja tasapaino: Kuka kaiken maksaa?
Valkila (2007): Better of Bitter Coffee? Implications of Fair Trade Coffee Certification…
Impact of FAIRTRADE:
Competitive producer
price / cost
• A producer that would
pFTr
p0
Transfer to
FT producer
QFT
Haaparanta (2007)
Q
produce given the world
price, now sells QFT to
the
FAIRTRADE
MC
markets at price pFTr and
Q–QFT to the world
market at price p0
• From the producers
point of view, identical
impact would be
generated by giving him
Quantity
the transfer in cash
Impact of FAIRTRADE:
Non-competitive producer
price / cost
• Suppose production has
loss
from
QSF
p0
QSF
Haaparanta (2007)
Q0
fixed-cost + rising marginal
AC
cost leading to U-shaped
average costs
• Then the equilibrium price is
p0 and producers produce Q0
and small farms that would
be able to produce QSF will
not enter the market
• FAIRTRADE is aimed at
small farms; if the transfer
(previous slide) is larger than
the loss here, the amount of
Quantity
production will increase
Impact of FAIRTRADE:
Production increases, price decreases
price
• For any given world price,
there is now more
S1
production → price
decreases
• The weakest producers not
participating in FTr will go
bankrupt (prev. & next slide)
• Thus there is transfer from
weak regular producers to
the FAIRTRADE producers
D
AND consumers of the
regular product
Quantity
S0
p0
p1
Haaparanta (2007)
Impact of FAIRTRADE:
Regular production and demand decrease
price
Regular Market
• Since some of the regular
producers leave the market,
supply curve shifts from S1
S1
to S2
• At the same time, consumers
shift consumption towards
the FTr product and demand
curve shifts from D0 to D2
• However if FTr has
increased total production,
D0 the price of regular product
still decreases in comparison
to no FTr
S0
S2
p0
p2
p1
D2
Quantity
Haaparanta (2007)
Summary of FAIRTRADE
• FAIRTRADE creates a transfer from weak producers
of the regular product to the FTr producers and
consumers of the regular product
• Even FTr producers may be hurt, since they typically
sell only a fraction of their production to the FTr
system
• Further topics: Allocation of quotas, FTr as a device
for price discrimation in rich countries (see e.g.
Harford’s “the Undercover Economist”, 32-35).
• More efficient policy: Direct conditional cash transfers
such as PROGRESA
Haaparanta (2007)
PROGRESA
(now called OPORTUNIDADES)
• Launched in August 1997 to improve education,
health and nutrition of poor families (particularly
children and their mothers) in Mexico
• Consists of cash transfers to poor households
conditional on child school attendance and
visits to health centers
• Hard evidence on the effectiveness of the
program exists due to random assignment of
the pilot villages
http://www.ifpri.org/themes/progresa.htm
Suggested Further Reading
• Martin Wolf (2004): Why Globalization Works?
Yale University Press
• Joseph Stiglitz (2006): Making Globalization
Work. W.W. Norton
• Paul Krugman (1996): Pop Internationalism. MIT
Press