Trade, wages and jobs

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Trade, wages and jobs

• The arguments for and against trade but first
  lets talk about the hottest topic in world
  trade CHINA

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Wages in the World Economy
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The Worlds Workforce China, US and Japan
comparison
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China and US Economies have very different
employment base. As China industrializes it will
need to shift a large part of its labour force to
industry and servicesthe first step will be to
industry
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Where will jobs in China come from?
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China The growing importance of exports
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What does China Export? Mostly Manufactured Goods
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Arguments Against Trade

• Trade makes people poor
• Trade reduces national security
• Trade hurts the environment
• Trade hurts children in developing countries and
  leads to exploitation of workers
• Trade reduces wages
• Trade kills jobs

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Many arguments-many of them related

• In this lecture will discuss what has been
  politically by far the most important of these
  argumentstrade and its impact on employment and
  wages
• One finds debates on these issues in both high,
  middle and and low income countries
• Increase in trade is important to all these
  countries but for different reasons
• Political demands to limit foreign competition or
  imports is by far the most common argument in the
  higher income industrial countries for them the
  exports from China loom large

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Variations on the jobs and trade debate

• The argument we hear most often in high income
  countries is that workers in manufacturing cannot
  compete with low wage labour from countries such
  as China ( US, Europe)
• In developing countries the argument is either A)
  workers in a developing country industry cannot
  compete with high tech-capital industry from
  industrial countries (low productivity versus
  high productivity)
• B) more recently the argument has shifted to the
  proposition that they cannot compete against
  China, were wages are even lower and productivity
  even higher
• A related but slight different argument for
  emerging market economies is that you cant allow
  imports because they inhibit the
  industrialization processthis is the exports
  good/imports bad argument (commonly heard in
  China, India, East Europe, Brazil)
• So (almost) everybody is against trade!!! If so
  why is there so much of it?

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Where this debate does not happen! Some countries
actually like tradea lot

• It is instructive to note there are countries
  where this debate is relatively unimportant in
  political dialogue
• Countries that a) are high income b) large
  exporters and c) relatively small --fall in this
  categoryeg. Singapore, Ireland, Finland etc.
• Why? Because in these countries everyone
  realizes that a) exports are the source of jobs
  and high wages, and b) they are at biggest risk
  of losing if there is a general increase in
  protectionism elsewhere in the World Economy
• Canada falls somewhere in between but generally
  the trade and jobs debate is not nearly as
  important here as in the USmost of the time we
  worry about losing jobs from US protectionism and
  there is strong focus on developing new export
  markets

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Consider first the high income/high wages
economies like the US and Europe Are workers in
these countries going to lose their jobs to
imports from low wage countries?

• The answer to this question is NO
• First, the bulk of high income country trade is
  with other high income countrieseg. In the case
  of Canada for eg. 87 of our trade is with the US
• Low wage imports however are growing and so we
  need to understand if it is likely they are going
  to kill jobs as is so often asserted

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From low costs to comparative advantage

• The idea that a country should export goods that
  it can produce cheaply is understood by almost
  everybody
• Unfortunately many if not most people take that
  argument to imply that a country like China will
  export everything because it is a low wage-low
  cost country
• This latter argument is WRONG and was Ricardos
  pointHow to make the link?

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A country cannot export everything-Why?

• First, one point is that the purpose of trade is
  not Mercantilism ie to accumulate money
  (gold)the purpose of trade is so that you can
  import that which you are not good at producing
  (or cant) and export that at which you are good
  at making
• If Canada had to consume all the lumber it
  produced it would have very cheap lumber, but we
  would much worse off because we could not import
  HD TVs and other goods we do not produce

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To see why lets first talk about productivity
and how it is related to costs. Lets define
productivity

• Let Y be a measure of output (say cars) and L be
  a measure of labour inputs (say hours of work)
• Average productivity (which we will call A) is
  defined as output(Y) A (productivity)
  ----------------------------- input(L)
• At a point in time for a particular country and
  industry productivity is taken as given. It is
  determined by a lot of things, including
  technology, organizational structure, management,
  capital investment, education of the labour force
  and other factors affecting overall economic
  environment.

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Costs, wages and Productivity

• Let W be the wage rate and Cost be the labour
  cost per automobile( for example) . By
  definition Cost W/A
• Eg. Suppose W40 and A.01 . That means to
  produce 1 car it takes 100 hours of labour. Then
  Cost4000.
• So costs are increasing in wages but decreasing
  in productivity. Industries and firms compete on
  cost NOT on wages alone. You can be low cost
  because a) you have low wages OR b) you have high
  productivity

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There are lots of studies on the comparisons of
productivity across countries. Below is a table
from one study done for 1990. All levels are
expressed relative to the US level. Note how
much variation there is. Japan is the most
productive in cars but least productive in food.
Germany is good at metal working but poor at beer.
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Average Productivity for a range of countries
relative to US 1997
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What do we learn from this

• Most emerging market and developing countries
  have very low productivity levels
• Wages in these countries tend to reflect average
  productivity levels
• Later on we will discuss exchange rates these
  are yet another factor which are quite important
  in affecting relative costs over the short run
  but over several years tend not to matter
• High wage countries can still be the low cost
  country internationally because they have high
  productivity

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So low wages in one country( eg. China) doesnt
mean that country will export everything

• The Law of Comparative advantage tells you which
  goods a country is likely to export and those
  which it is likely to import
• The low cost argument avoids the issue of what
  determines the average level of costs ---ie.
  Wages AND productivity in an economy
• Wages in China are low and thus some of its costs
  are low, but China imports many thingsincluding
  food, natural resources, and high technology
  goods-good for which it has a very low absolute
  productivity level

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What do high cost countries export?

• Wages are high in the US for example and thus
  they do not export some goodslike clothing for
  example
• But just because wages are high does not stop
  exports
• The US exports Boeing airliners for example
  because the US, even with its high wages can
  produce large modern airliners cheaper than
  almost anyone elsethey have a comparative
  advantage in that good
• The reasons wages are high in the US and low in
  China will be covered later but the basic reason
  is that ABSOLUTE productivity levels in the US
  are on average much higher than in China

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If a high wage economy trades with a low wage
economy does it lead to lower wages in high wage
economy? NO

• The average level of wages is determined by the
  average level of productivity in the economy as a
  wholetherefore unless you think that trade will
  lower productivity there is no reason to believe
  by trading more with low wage countries you will
  lower the average wage level in the economy
• What is true is that if you open up trade with a
  low wage country that you did not previously
  trade with this will displace some low
  productivity activity in the domestic high income
  economy
• If the economy responds to this by moving people
  in low productivity sectors to high productivity
  sectors this will tend to raise the average level
  of wagesnot lower them
• Therefore how labour markets respond to various
  changes becomes importantour next issueJOBS.

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Jobs and trade

• Increased imports are a job killer! A common
  headline in many magazine and newspaper articles
• Recently this old argument has been re-packaged
  as outsourcingthe US economy is sending jobs
  overseas through the activities of US
  corporations who have replaced some domestic base
  operations with foreign basedmostly in IT and
  some particular sectors like call centers, and
  backoffice white collar jobs

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Job creation and destruction

• What creates and destroys jobs? Lots of
  thingstechnological change, wars, government tax
  and fiscal policies, shifts in demand for
  different goods and serviceslist is very long
• Every day new jobs are created and old jobs are
  destroyed. This is the market economy at work.
• On average in the US 3 to 4 percent of all jobs
  are destroyed every year and about the same
  number are created by new or existing firms
• About 20 percent of the labour force turns over
  year
• How important is trade in all this? Answer-- not
  much.

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Trade channels

• When imports increase and displace domestic
  workers this reduces the number of jobs in the
  sector impacted
• However trade is a two-way street increases in
  imports are usually accompanied by increases in
  exports and this creates jobs
• On balance what is important is the net
  effectgains-losses most research shows it is
  smallsometimes negative and sometimes positive

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Exports create jobs and Imports Displace Jobs
Trade is a two way street

• Undoubtedly workers in some firms have lost there
  jobs due to foreign competition but that is only
  part of a much larger story
• With labour markets that work well, and most of
  our labour markets do, as trade increases jobs
  shift from import competing to export oriented
  activity or services
• ON BALANCE overall trade seems to have had a very
  small effect on net employment in the higher
  income countries

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Developing Countries and Trade

• still in transition towards industrialization,
  the agriculture sector is very large source of
  employment, and labour markets often heavily
  regulated
• Limiting imports seen as way to industrialize and
  create jobsthe argument used to support this
  view was that these countries could not compete
  against industrial country productivity levels,
  so they first had to industrialize, raise their
  productivity levels and then open up to trade
• Import substitution just seemed to lead to a lot
  of inefficient state controlled monopolies with
  low wages and high prices
• Basically it was a very unsuccessful
  strategyrecall the story of India in the
  Commanding Heights seriesby late 70s World Bank
  and many others suggested a shift toward export
  led manufacturing based in part on the successful
  Japanese model would be the way to go

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The Export led development strategy

• So a number of developing shifted their economic
  development strategy to one focused on exportsie
  export labour intensive manufacturing products to
  industrial countries
• This was very successful strategy pursued by
  Asian Tigers-Hong Kong, Korea, Taiwan, Singapore,
  Malaysia all small countries but large exporters
• In these cases exportsindustrializationjob
  creation
• Later the same strategy was pursued by East
  European and Latin American Economies in 1990s

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The New Developing Country Giants How will they
create jobs?

• In large developing countries creating jobs is
  the major economic challenge (China, India,
  Indonesia)
• At the moment these countries are trying to mimic
  the export led manufacturing strategies of the
  Asian Tigers
• For eg. in China large scale movement of people
  from interior agricultural regions to coastal
  industrial regions
• Problem limits to exports as engine of job
  creation due to limits on industrial countries to
  take these exports and political problems it
  creates there (look at US debate on Chinese
  imports)
• So while trade can be a mechanism for country to
  lift itself up the economic ladder, for the large
  developing countries export led manufacturing
  strategies is creating a backlash in the
  industrial countries

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Middle Income/Emerging Market Economies

• The labour market issues in these economies
  slightly different (eg. Asian Tigers, Mexico,
  Argentina, some East European economies)
• Many of these countries have done well based on
  manufacturing exports but now they are losing out
  to China and India
• A number of plants in Mexico have closed for
  example because they cannot compete with China
• The economic and political pressures we normally
  think of as being industrial country issues are
  now hitting these countries

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Their response to import competition

• In the fact of this new import competition to
  their traditional base there are two possible
  responses
• A) use protection to create domestic based
  employment to compensate for loss of export
  market
• B) try to develop new export market by moving
  into higher value added products
• Higher value added means workers add more value
  (dollars) to the production process and this
  supports higher wagesto get higher value added
  usually have to a) use more capital in the
  production process and b) produce more
  technologically sophisticated products which
  means workers be more skilled

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What works?

• East Asia is going the higher value added
  routeso far seems to be working
• In Latin America a variety of responsesBrazil is
  doing both
• Mexico given it wants to remain in NAFTA cannot
  really use protection as an instrument so it is
  going to have to focus on moving up the value
  chain
• In Eastern Europe mostly the B choice although
  close proximity to large European countries has
  diminished thus far the importance of China-India
  competition