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
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2B: Empirical evidence
•
•
•
•
•
The trade versus technology explanation
Soft consensus
Endogenous technological change
Trade in intermediate inputs
Inequality increases in developing countries
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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)
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5
2B: Qualitative evidence
• Correlation between the volume of imports and relative
demand for less skilled workers
• Early evidence that trade affects wages in importcompeting 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
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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)
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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)
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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
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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
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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
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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
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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
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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
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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
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2B: Endogenous technological change
• Empirically difficult to disentangle the SBTC vs StolperSamuelson 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)
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2B: Dinopoulos and Segerstrom
Role of trade openness in reducing the relative wage of lessskilled 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 (NorthNorth trade, no change in relative prices)
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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)
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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
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2B: Thoenig and Verdier (continued)
• Results:
- No effect on relative prices
- Increased inequality in all regions, either under NorthNorth 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