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CHAPTER 2:TRADE AND WAGES

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. 2B: Empirical evidence. The trade versus technology explanation Soft consensus Endogenous technological change

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CHAPTER 2:TRADE AND WAGES

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  1. 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

  2. 2B: Empirical evidence • The trade versus technology explanation • Soft consensus • Endogenous technological change • Trade in intermediate inputs • Inequality increases in developing countries

  3. 2B: Theoretical debate in the 1990s: Trade versus Technology • Increase in wage inequality has been associated with a secular increase in the share of high-skilled workers (opposite effects of labour supply shift) • The main explanation must come from shifts in labour demand that are detrimental to low-skilled workers • In the same period, trade flows have increased markedly: trade with developing countries generates an increase in the demand for high-skilled workers relative to low-skilled workers (i.e. a decrease in demand for low-skilled workers relative to high-skilled workers)… • … but the use of computers and decrease in telecommunication and (some) transport costs offer a competing explanation based on technological developments: skill-biased technological change (SBTC)

  4. 2B: Qualitative evidence • Correlation between the volume of imports and relative demand for less skilled workers • Early evidence that trade affects wages in import-competing sectors: - through its effects on rents (chap. 1), trade affects wages - the more so, the higher the workers’ bargaining power (Abowd and Lemieux, 1993) • negative impact on low-skilled workers depends on market structure and is greater in concentrated sectors (Borjas and Ramey, 1995) • Trade with developing countries contributes to the increase in wage inequalities in « flexible » developed countries

  5. 2B: Quantitative assessment • However, the effect is quantitavely small: imports from developing countries still represented a small share of GDP • Weak evidence based on changes in relative good prices • The traditional HO model cannot accommodate, given the size of North-South trade, the magnitude of the relative factor-price changes that has been observed in countries such as the USA or the UK • Greater increase in inequality within than between sectors • A soft consensus emerged that, based on standard trade theory, trade could explain at most 20% of the increase in wage inequality in developed countries Paper 2: Blum (2007)

  6. 2B: Polarisation of the labour market • Nature of inequality has changed over the last 30 years: • end of 1970s – early 1990s: increasing ineq. in the USA was spread over the whole wage distribution • since 1990s: ineq. has continued to increase, but only in the top of the distribution; slight decrease of ineq. in the bottom Between 1980 and 2005, 80% of the increase in D9/D1 is due to D9/D5 • Increase in ineq. in the top of distribution in non Anglo-saxon countries (e.g. Germany) • The rise in the top (>D9) is mostly due to very top (>D99)

  7. 2B: Causes of polarisation • Institutions vs complex technical changes (Lemieux, 2007, vs Autor, Katz & Kearney, 2007) • Importance of the debate: institutions are the results of policies, while technical changes are “natural” trends that are difficult to offset • Institutions: • Decrease in the minimum wage in the bottom • Pay mechanisms on the top: performance pay, deunionisation, financial market development

  8. 2B: Causes of polarisation (continued) • Polarisation of wages is associated with polarisation of jobs (demand effect) • Technical changes that are more complex than SBTC • Computers complement non-routine (abstract) cognitive tasks, substitute routine tasks, and have little impact on non-routine manual tasks • routine: bookkeeping, clerical work, repetitive production tasks • non-routine cognitive: problem-solving, management, coordination • non-routine manual: truck drivers, waiters, security guards, janitor

  9. 2B: Causes of polarisation (continued) • Globalisation and polarisation: • offshore outsourced jobs are typically not the non-routine manual tasks that are rather protected from foreign competition (Paper 3: Grossman & Rossi-Hansberg) • globalisation put pressures on labour market institutions (minimum wage, unions, see chapter 4) • globalisation and superstars • international financial integration might contribute to the increase in the inequality in the top

  10. 2B: Developing countries • In the last two decades, the percentage of the world’s population living on less than $1 a day has been halved, falling from 40 to 20% • In a number of countries, trade and FDI have contributed towards reducing poverty (even though financial crisis are very costly to the poor) e.g. Mexico, India, Zambia, Columbia, Poland • Clark, Dollar and Kraay (2001): • ineq. between population-weighted average incomes of the globalising countries has decreased substantially between 1975-95 • within-country ineq. has generally increased • poverty has been reduced

  11. 2B: Developing countries (continued) • Relationship between globalisation and poverty is complex, and depends on interactions between globalisation itself and: • investments in human capital and infrastructure • policies to promote credit and technical assistance for farmers • macro stability

  12. 2B: Developing countries (continued) Contrary to straightforward intuition based on SS, overall evidence of increases in wage inequality But, those involved in export activities are not necessarily the poorest: - sectors which are relatively unskilled intensive in a global context may require workers with more skills than the poor typically possess in developing countries - ex. of Mexico: both winners and losers among the poor, as large corn farmers gain, and small and medium corn farmers lose 14

  13. 2B: Developing countries (continued) • Careful interpretation HO / SS predictions (i.e., globalisation is pro-poor) are based on the assumption of free mobility of labour across sectors: labour has to move out of contracting sectors into expanding ones • However, evidence points towards severe impediments in labour mobility • Moreover, developing countries have historically protected their unskilled intensive sectors: trade means less protection for workers in these sectors, and poverty rates have increased in previously protected sectors

  14. 2B: Endogenous technological change • Empirically difficult to disentangle the SBTC vs Stolper-Samuelson explanation: both channel trough changes in relative prices • Foreign competition might induce firms to create/use new technologies, to fragment production, to differentiate their products, etc. • Technology could be endogenous to trade: a more competitive environment might induce firms to develop new technologies that are more skill intensive • Dinopoulos and Segerstrom (1999) • Thoenig and Verdier (2003)

  15. 2B: Dinopoulos and Segerstrom Role of trade openness in reducing the relative wage of less-skilled workers has been underestimated Assumption: R&D is skill intensive in all sectors, while production is low-skill intensive in all sectors • Trade liberalisation increases the profitability of innovating in all sectors • Trade liberalisation benefits to the leaders of each sector (Schumpeterian effect) • A Stolper-Samuelson-type effect implies that low-skilled workers are hurt this works even if countries have the same endowments (North-North trade, no change in relative prices)

  16. 2B: Dinopoulos and Segerstrom (continued) • Effects of trade liberalisation (between identical countries): • increases R&D investment • reduces the wage of low-skilled workers • results in skill-upgrading within each industry (R&D is skilled-labour intensive) • However, in this Schumpeterian version of SS: - relative prices are unaffected - wage inequality increases in both countries - trade induces factor-bias technological change - the rate of global technological change rises (at least temporarily)

  17. 2B: Thoenig and Verdier • Globalisation can trigger defensive innovations: - more intense international technological competition triggers a race to imitation and innovation - firms develop less imitable innovation - to lessen the threat of imitation and technological leapfrogging, firms have incentives to increase the share of tacit knowledge and non-codified know-how; they do so at the cost of a larger share of skilled labour

  18. 2B: Thoenig and Verdier (continued) • Results: • No effect on relative prices • Increased inequality in all regions, either under North-North or North-South trade • Consistence with empirical evidence: firms more exposed to the threat of foreign competition tend to bias more their innovations towards skilled labour

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