Lecture 1: Trade and Labour

1. Lecture 1: Trade and Labour H. Vandenbussche

2. Research questions • Link between imports from low-wage countries and firm-level employment growth? • Link between imports from low-wage countries and firm-level skill-upgrading?

3. Theory: « Old »  Trade Theory • Explains why countries trade in DIFFERENT products MACHINES CHINA EU TEXTILES

4. 3. « Old » Trade Theory K:Capital EU Machines CHINA Textiles L: Labour

5. « New » Trade Theory • Explains why countries can trade in SAME products but with DIFFERENT factor intensities TEXILES CHINA EU TEXTILES

6. « New » Trade theory K: Capital EU High quality Textiles CHINA Low quality Textiles L:Labour

7. Hypothesis • Based on endowment theory we expect firms’ employment growth to decrease with exposure to low wage import competition • Firm capital and skill intensity increase employment growth more in industries with low wage import competition

8. Bernard et al. for US plants

10. Conclusion • Low wage imports negatively affect employment growth of large firms • capital intensive firms suffer less from low imports in terms of employment growth • No significant result for skill effects • Endogeneity of industry level imports is accounted for using tariff rates

11. Biscourp and Kramarz for France • Distinguish between intermediate imports and imports of finished goods Definitions: finished good: when imported good coincides with that of importing firm (~outsourcing) intermediate good: when imported good is different from that of importing firm • Include firm-level measures of innovation to control for skill biased technological change

13. Trade and Employment growth

14. Trade and Unskilled workers

15. Conclusion • Low wage countries do not have the negative role often described in the press • Firms importing finished goods (~outsourcing) destroy more jobs than those importing intermediates conditional on changes in local purchases • Exporting positively affects employment growth • Results are robust to inclusion of technology variables (Bloom et al) • But! No controlling for endogeneity of imports and exports

16. New event! • The importance of China since nineties may alter results • China’s exports features some overlap with production structures in developed countries • i.e. its effect may be more nefast on employment growth but may offer opportunities for skill upgrading

17. Hypothesis 1: Imports from China negatively affect firm employment growth • Hypothesis 2: Imports from China result in skill upgrading in developed countries

18. Imports from China, firm growth and survival and skill upgrading: Evidence from Belgium G. Mion (LSE), H. Vandenbussche (UCL), L. Zhu (Kul)

19. Data • ’96-2006 • Education as a measure of skill at the firm-level allows within firm skill upgrading • Firm-level measure of outsourcing • Distinction between final and intermediate imports • Methodology • We distinguish China from other low wage countries • Instruments for Trade (tariffs and exchange rates) • Controls for innovation • Notes

20. Stylized facts: (1) Declining manufacturing employment

21. Stylized facts: (2) Increasing share of non-production workers

22. Stylized facts: (3) More skilled labour force in manufacturing

23. Stylized facts: (4) Rising manufacturing imports from China and other low-wage countries

24. Literature: • Schott (2008) showed that China’s export similarity with OECD countries is higher than that of other non-OECD countries and this similarity is growing much faster than any other countries. • This finding highlights that firms in developed countries are much likely to face competition from Chinese exports rather than that from other low-wage countries' exports, since the later have much less similarity with their productions.

25. Trade variables: -Industry-levl import share -Firm-level outsourcing of finished goods -Firm-level outsourcing of intermediate goods (similarly defined) Firm characteristics: -Size (log empl.) -Average wage (wage bill/empl.) -Labor productivity(value added/empl.) -Capital intensity (tfa/empl.) -Intangible capital intensity (itfa/empl.) Data: main variables used

26. Trade and employment change (BJS, 2006) • Econometric model: =firm characteristics: size, labor productivity, capital intensity, intangible capital intensity and average wage =industry-level import share of different country groups =firm-level outsourcing to different country groups (finished and intermediate) =time fixed effects =firm fixed effects

27. Table 2: trade and employment growthOLS IV industry IV industry and IV firm

28. Table 3: trade and share of production workersOLS IV industry IV industry and IV firm-level trade

29. Table 4: trade and skilled workersOLS IV industry IV industry and IV firm-level

30. How much can Chinese imports explain skill upgrading? • Chinese imports alone can explain around 30% of the total skill upgrading in Belgian manufacturing during the period of 1996-2006

31. Trade and firm death • We estimate a linear probability model: • Whear Death is a dummy variable denoting firm death. We defined a firm as dead if it disappears from the data set in the next year or for the next two years.

32. Table 5: Trade and firm death (1)

33. Table 6: Trade and firm death (2)

34. Conclusions • Imports from low-wage countries are important in explaining employment growth in Belgian manufacturing • imports from China play more important role than that from other low-wage countries. • Firm-level outsourcing to China leads firms to upgrade their occupational composition of employment, although it does not affect the level of employment significantly. • Import competition from low-wage countries/China only has weak impact on firm death