Trade and Employment

Trade and Employment Challenges for Policy Research A joint study of

This joint study • provides an impartial overview on “trade and employment” ... • focuses on connections between trade policies, and labour and social policies ... • brings together several streams of literature ... • identifies challenges for research

This joint study • Does not give policy advice • But does help policy makers to think about policy design

Trade and Jobs • Does trade create jobs ? • Does trade destroy jobs? • Trade does both things ! • Many other policies/events create or destroy jobs • Net employment effects have differed across countries

Trade and Jobs Trade appears to create and destroy jobs in all sectors involved in trade • Good news ? Reallocation easier within than across sectors • Bad news? A wider range of jobs are at risk and more difficult for policy makers to predict which jobs are at risk

Trade and income • Does trade raise income? Average income is likely to rise • Does trade raise wages ? Average wages are likely to rise, but little evidence on this issue • Does every worker’s wage rise? Probably not, but depends on the country

Trade and inequality What do we know about inequality? • It is on the increase in many countries (but not all). In relative terms: • Capital owners are likely to get better off • Many skilled workers get better off, but not all • Low skilled workers are likely to get worse off • Technological change is the main driver of this phenomenon

Trade and inequality • Does trade raise inequality? • In industrialized countries probably yes • Some developing countries experienced increases, others decreases in inequality after trade reform • Timing of trade reform, FDI and technological change explain differences in performance • But trade is not the main driver !

Trade and inequality • How does trade affect inequality? • Low skilled workers in industrialized countries lose from trade with low wage countries • Trade in general (also among industrialized countries) increases competition among workers => possible loss in bargaining power

The role of policy makers Trade policy interacts with: • Labour market policy • Distribution policy • Education policy • A number of other policies Coherence helps to optimize outcomes

Trade and labour market policies • Insuring workers against adverse professional events • Workers value security • Modern economies need to constantly reallocate resources • There is probably a trade-off between efficiency and insurance Trade-off does not need to be steep

Trade and labour market policies • Facilitating transition following trade reform • Industrialized countries have social protection systems and/or trade adjustment schemes and pursue active labour market policies • Many low and middle income countries have neither • Could trade adjustment schemes help out? • How to introduce and to finance them?

Trade and the informal economy • Do freedom of association and the right to bargain reduce countries’ competitiveness? NO ! They are more likely to increase productivity

Trade and labour market policies • Does trade lead to an increase of the informal economy? No conclusive evidence • Do workers in the informal economy get better or worse off with trade? No conclusive evidence Lack of evidence is due to lack of data

Trade and redistribution Policies • Redistribution policies useful to counter increasing inequality, but: • Redistribution affects incentives • Of those who pay • Of those who receive • How to redistribute from mobile winners to immobile losers? • Which is the role of redistribution in capacity constrained developing countries?

Trade and education policies • Can act as redistributive tools • Determine countries’ absorptive capacity and thus benefits from innovation • Affect individuals’ ability to take advantage from trade • Affect individuals’ capacity to deal with change

Trade and education policies Challenge: • Skills required are likely to change continuously during working life • Increasingly difficult for policy makers to predict required skills Finding appropriate answers to this challenge is crucial

Other challenges • Increase supply response in developing countries • Ensure that financial markets support efficiency and stability • Take adjustment process into account when setting the pace of trade reform that suits

Conclusion Trade and labour and social policies do interact Greater policy coherence can have significantly positive impacts on • growth effects of trade reform • on public support for trade reform Research to support this would have high payoffs

Trade and Employment