CHAPTER 3:TRADE AND EMPLOYMENT

1. CHAPTER 3:TRADE AND EMPLOYMENT 1 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 1

2. 3B: Imperfect labour mobility • Previous models rely on perfect labour mobility between sectors • However, when a worker loses a job in import competing industries, it might take time before she finds another job in export / non-tradable sectors • An extreme case is specific factors models (Jones & Samuelson), that provide useful insights for the analysis of short-term impacts

3. 3B: Specific factors • Realistic property: resources cannot move immediately and costlessly between from one sector to another, one geographical location to another • Many factors are specific in the short run: industries differ in the factors they demand Example beer vats vs stamping press are short-term factors the corresponding long-term factor is capital

4. 3B: Specific factors (continued) . Distinction between short run and long run is very important in practice: SPEED OF ADJUSTMENT IS CRITICAL Orders of magnitude • average US labour: 6 years When a US state hits econ. difficulties, workers leave for other states; within six years the unemployment rate falls back to the national average (Blanchard & Katz, 1991) - typical specialised machine: 15-20 years - shopping mall, office building: 50 years HOWEVER, LABOUR WITH VERY SPECIFIC SKILLS CAN BE STUCK LONGER

5. 3B: Specific factors (continued) • Specific factors model and income distribution • Main feature: a specific type of labour is attached to a particular sector. Interesting implications for less extreme situations (differences in turnover rates across sectors)

6. 3B: Structure • 2 goods x 3 factors ( 2 specific, 1 mobile) • For example: • agriculture: land (specific) + labour (mobile) • manufacture: capital (specific) + labour (mobile) • Output shares depend on the allocation of the mobile factor across sectors • Trade between two countries depends on comparative advantage • Comparative advantage is influenced by relative endowments in specific factors

7. 3B: Changes in relative prices • What is the effect of an increase in p1 / p2 ? • more resources are brought in sector 1 • price of the specific factor in sector 1 increases relative to p1 (and thus in real terms) • price of the specific factor in sector 2 decreases relative to p2 (and thus in real terms) • price of the mobile sector increases relative to p2, but decreases relative to p1: ambiguous effect in real terms depending on the composition of their consumption basket

8. 3B: Gains / losses from trade • Trade benefits the factor that is specific to the export sector of each country • Trade hurts the factor specific to the import-competing sector of each country • Trade has ambiguous effects on the mobile factor • Overall gains

9. 3B: Davidson, Martin, Matusz (DMM, 1999) • Important differences in turnover rates and adjustment costs across countries (more or less “flexible” labour markets) recruiting, hiring, training, firing, etc. • Turnover costs influence equilibrium prices and affect the pattern of trade • Trade and search generated unemployment • Determinants of comparative advantage must include features of the labour market, such as turnover rates • Distributional effects are between Stolper-Samuelson impacts and those of Specfic Factors model

10. 3B: Intuition in DMM • Search generated unemployment implies that, for each factor, trade generates distributional effects also between searching (i.e. unemployed) and employed factors • Extension of Stolper-Samuelson results … , however, for searching factors • Search costs create de facto an attachment of employed factors to the sector in which they are employed, hence a specific factor flavour • For employed factors, total effect combines SS and specific factor effects. That is, the sector in which it is employed matters

11. 3B: Example • Assumptions: 2 sectors, 2 factors: high-skilled, low-skilled full employment for high-skilled labour search cost unemployment for low-skilled labour • Trade between North and South • Results: - Skilled labour gains unambiguously - (Low-skilled) unemployed lose unambiguously • What is the effect for low-skilled employed workers? total effect combines SS effect (i.e. a loss) + change in relative prices of the good they produce, which means • Employed workers in low-skilled intensive sector lose • Ambiguous effect for employed workers in low-skilled intensive sector : SS (-), specific factor effect (+)

12. 3B: Explanation • When time and effort are required to find employment, an existing job creates a sectoral attachment: - employed workers are reluctant to quit their jobs to search for new employment • matched factors are somehow like immobile factors • Unemployed workers have no attachment: SS applies • When jobs are long lasting and difficult to find (low turnover), attachment is greater and specific factor effects are likely to dominate • Conversely, when jobs are short lasting and easy to find (high turnover), attachment is weaker and SS effects are likely to dominate

13. 3B: Turnover and comparative advantage • In a given sector, if jobs are relatively more durable or easier to get in a given country, this country will tend to specialise in that sector and export the corresponding goods. Why? • Because firms will face lower costs of attracting and retaining their workers compared with their foreign rivals, hence relatively lower producer costs

14. 3B: Efficiency wage and trade • Davis and Harrigan (2007) Efficiency wage (Shapiro and Stiglitz, 1984) + Melitz (2003) Efficiency wage model LM rents and unemployment arise from asymmetric information: • firms monitor their workers’ effort imperfectly • high wages to deter them for shirking • unemployment because eq. wages are too high Heterogenous firms (Melitz, 2003) Firms are heterogenous in both their ability to monitor effort and their technical efficiency Different wages for identical workers: good jobs and bad jobs

15. 3B: Davis and Harrigan • Good jobs: high wages / generous benefits / job security • Good jobs have an element of rent that bad jobs lack • Impact of trade liberalisation: • firm selection effect: powerful efficiency-enhancing selection effect (lowest cost firms expand, less productive firms contract or exit) • pressure on many « good jobs » : good jobs are destroyed, number of bad jobs • inequality? • unemployment