assessing and addressing the employment effects of trade : a knowledge sharing workshop...

Assessing and addressing the employment effects of trade : A knowledge sharing workshopIn

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Samuel G. AsfahaITC-ILO

Assessing and Addressing the Effects of Trade on Employment : A Knowledge Sharing Workshop

Jakarta, Indonesia.12-16, July 2010

Trade and Trade and Labour Market AdjustmentsLabour Market Adjustments

Trade and Labour Market AdjustmentsIn

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Learning objectivesLearning objectivesTo map out trade-induced labour market

adjustment costsTo compare long-term gains and short-term

costs of international tradeTo understand controversies on how big

and important adjustment costs are in theoretical and empirical economics literature

To map out the scope for policy interventions


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OutlineOutline Trade as a source of adjustment costs Traditional trade theory in glimpse The Hecksher-Ohlin / Stolper – Samuelson

predictions Adjustment costs in economics paradigm ‘Smooth labour market adjustment hypothesis” Types and speed of adjustment costs Short term adjustment vis-à-vis long term gains Policy options Adjustment options in WTO


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Trade as a source of adjustment costs:Trade as a source of adjustment costs:

Exogenous trade-induced shocks– E.g. change in price (due to change in demand,

change in factor endowments, changes in technology etc), e.g. is trade as transmission channel of external shock

Endogenous trade-induced shocks– E.g. change in trade policy (tariffs, subsidies etc.)

Empirically it is difficult to isolate the two types of adjustment sources.


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Traditional trade theory - A glimpseTraditional trade theory - A glimpse

The traditional trade theory’s prediction that trade liberalization leads to a long-term gain is widely accepted.

The fact that trade creates winners and losers is also fully accepted.

The national welfare gain is often explained by what is called the Samuelson compensation principle:– The winners gain enough from liberalization to allow

them to fully compensate the losers without exhausting all of their gains, i.e. the overall national gain from trade liberalization is bigger than the loss!!


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Recall, what the traditional theory (for example the Hecksher-Ohlin theory) says about inter-sectoral resource reshuffling!


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Traditional trade theory – A glimpseTraditional trade theory – A glimpse

The HO theorem:– Countries export goods that intensively use their

abundant resources and import goods that need intensive use of their scarce resources

– So it shows patters of specialization The Stolper-Samuelson theorem:

– Built up on the HO model to predict patterns of employment and the income distribution effects of trade.


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The Hecksher-Ohlin / Stolper-The Hecksher-Ohlin / Stolper-Samuelson predictionsSamuelson predictions

In unskilled labour intensive country, the demand for skilled labour decreases– But, what if trade openness leads to a decline in

the cost of capital and intermediary goods?– Intense post trade-reform competition accelerates

the process of switching to more skill-intensive technologies


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The theory predicts that trade induces inter sectoral factor market (including labour

market) adjustments in the short-run with resources moving to expanding sectors.


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But, what are the adjustment costs of such inter-sectoral shifts?


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Do all workers and capital in the losing sector get employment in the gaining sector, and at a comparable or better pay and other working

conditions?


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But:

How fast and costly are the adjustments?– Could it be slow and lead to long term

unemployment or chronic underemployment?


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What factors could hinder or facilitate the adjustment processes and how could

governments best assist workers displaced by trade to re-integrate into the labour

market?


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Does different trade patterns induce different adjustment costs?

– E.g. intra-industry vis-à-vis inter-industry trade; North-South vis-à-vis South-South trade; trade in goods vs. in services …


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Adjustment costs in economics Adjustment costs in economics paradigmparadigm Among mainstream economic thinking, concerns on

labour market adjustments have been seen as misguided:– Employment effects of trade are small;

– Adjustments are fast and costs of adjustments are small compared to aggregate gains from trade

But, these views have been increasingly questioned both on theoretical and empirical grounds.


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““smooth labour-market adjustment smooth labour-market adjustment hypothesis” hypothesis”

Smooth adjustment hypothesis – – Adjustment pressures are negatively related to the

share of intra-industry trade in the expanded trade flow.

– Simply, intra-industry trade entails lower costs of labour market adjustment than inter-industry trade. What is the rationale behind?

originally suggested by Balassa (1966) now a widely accepted concept. .


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. Smooth adjustment hypothesis .. Smooth adjustment hypothesis .. Cont’dCont’d

Powerful intuition behind it. Not extensive empirical support yet

– studies exclusively focused on Western European countries and in manufacturing industries.


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Types of adjustment costsTypes of adjustment costs

In reality, long term trade reform opportunities come with short-term adjustment challenges (costs): – firm closures, – workers displacement, – Wage and/or job losses, – tax revenue losses, etc.


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The empirical literature is yet to address this issue

A hint in the literature (by Trefler 2001) shows an adjustment speed of 7 years in the case of US – Canada FTA

Speed of adjustmentSpeed of adjustment


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Short-term adjustment costs as Short-term adjustment costs as percentage of long-term gainpercentage of long-term gain

The bulk of the empirical literature shows that adjustment costs are very small compared to long term gains, however there are significant differences:– Magee (1972): 2-4 per cent.– Baldwin, Mutti and Richardson (1980): 4 per cent.– Melo and Tarr (1990): 1.5 per cent.– Winters and Takacs (1991): 0.5 – 1.5 per cent.– Davidson and Matusz (2000): 80 per cent.– McMillan, Rodrik and Welch (2002): > 60 per cent.


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Why such huge differences in the results ?– Difficulty of measuring adjustment costs!!!!– Diffculy of isolating trade-induced adjustment from

technology-induced and other adjustments – The variation in the result may reflect differences in

methodology used and assumptions made– Much of existing empirical work is rather crude and

imprecise. Are the results robust? – Empirical evidence is restricted to industrialized

countries. Can the results be extrapolated to developing countries?


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Despite, the differences in the result, the bulk of the existing evidences show small adjustment costs. Why then are policy makers and the public are continuously concerned about them?



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. Policy options for trade adjustmentPolicy options for trade adjustment

Credit market and social safety netsLabour market adjustment measures

– Unemployment benefits, Employability and skills enhancing

measuresGradual liberalizationExport promotion measures


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Adjustment measures in WTO Adjustment measures in WTO agreements/negotiationsagreements/negotiations

“Safeguard” measures– To protect domestic firms/producers from sudden

import surges following trade liberalization– Threshold for triggering “safeguard” measures

are based on “volume” of imports (volume triggers) or drop in domestic “prices” (price-trigger)


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Adjustment costsAdjustment costs

Trade-induced adjustment costs are serious concerns in many countries, yet little empirical knowledge, especially in developing countries, exists on:– Size of adjustment costs – Speed of adjustment– Distributional impacts of the adjustment costs– Etc …


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assessing and addressing the employment effects of trade : a knowledge sharing workshop...

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