Workshop 2: Trade, wages and employment: International evidence

1. Workshop 2:Trade, wages and employment: International evidence (1) How far does trade with the third world endanger the jobs of low-skilled workers? The Economist 10/1/94, Vol. 333 Issue 7883 (2) Economist; 12/7/96, Vol.341 Issue 7995: Trade and Wages

2. Question Read the articles following articles provided in your course reader • How far does trade with the third world endanger the jobs of low-skilled workers? The Economist 10/1/94, Vol. 333 Issue 7883 • Trade and Wages, Economist; 12/7/96, Vol.341 Issue 7995: With the entry of China into the World Trade Organisation, it has become a major player in the international trade market. • Use the Heckscher-Ohlin model to discuss the implications of China’s entry into the world market for the USA. Look at the impact on trade flows as well as on the returns to factors. • Does empirical evidence support the contention that increased trade with developing countries such as China has raised wage inequality in developed economies?

3. Solution Look at trade flows Analyse impact on Factor prices

4. Key assumptions • Two nations: China and USA • Choose the factors: ?? Skilled and unskilled L • Products? Skill-intensive goods (pharmaceuticals) & unskill-intensive goods (clothes) • China is unskill abundant and USA is skill abundant • Same production technology • Constant returns to scale • Identical preferences • Perfect competition in all markets • Zero transport costs or trade barriers

5. US PPF I1 A (Px/Py)CH (Px/Py)US China PPF • (Px/Py)US > (Px/Py)CH • Cloth relatively cheap in China • Pharm relatively cheap in US How does trade with developing countries affect trade flows in developed countries? Pharmaceuticals (Y) Also (w/r)US > (w/r)CH Cloth (X)

6. New producer point I2 New consumption point B Exports P* = P*x/P*y Imports US PPF Trade causes price convergence, i.e. (Px/Py)CH rises and (Px/Py)US fallsLets look at US Pahrm (Y) I1 A P = Px/Py Cloth (X)

7. Factor markets r SK w SL Factor-Price adjustments in US: Excess Demand for K Excess Supply of L w0 r1 r0 w1 DL1 DK2 DK1 DL2 K L

8. China Stolper-Samuelson theorem: Stolper-Samuelson theorem draws a link between changes in relative product prices and relative factor payments

9. International Evidence

10. Evidence: International • Significant rise in imports from developing countries • USA: 5% in 1978 – 11% in 1990 • Rising unemployment of less skilled in OECD countries • Ratio of skilled to less skilled wage rose from 1.52 to 1.65 between 1982-1990 in US. • Real wage of men with 12 or fewer years schooling fell 20% • Employment of skilled labour rose sharply during the 1980s in US • labour demand driving this

11. No conclusion to debate • Lawrence and Slaughter (1993) find that the PU/PS did not fall in US • Despite rising wages of skilled, ratio of Skilled/Unskilled is rising in firms • Technological change is responsible for decline in wages of unskilled • Adrian Wood: This technological is due to trade liberalisation

12. Other problems • Theory suggests that we should find declining wage inequality in developing countries • However, Ws/Wu rose in Latin America • Reasons • Other factors drive wages (inflation, government policy, capital flows) • Trade causes imports of new technology that benefits skilled workers • China effect. Latin American countries are no longer abundant in unskilled labour.