Labor Markets, Globalization and Poverty

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Labor Markets, Globalization and Poverty

• Ann Harrison
• UC Berkeley and NBER
• World Bank
• March 23, 2006

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Two Issues Addressed Today

• Labor market policies affect the linkages between
  globalization and poverty
• Trade reforms what impact on the poor?
• Labor markets determine HOW reforms affect the
  poor
• Direct labor market interventions and their
  impact on wages and employment
• Labor market interventions (minimum wages)
• Anti-sweatshop movements

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Issue 1

• What is the relationship between globalization
  and poverty?
• How do labor market institutions affect that
  relationship?

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First issue addressed by forthcoming NBER study
under my direction

• Definition of globalization
• trade (tariffs/trade shares)
• capital flows (foreign investment, aid, capital
  flows)
• 15 papers
• Theory (from Globalization to Poverty)
• Cross-country evidence
• Country case studies based on micro data
• Concerns of globalizations critics (Aisbett)
• Policy Implications
• See Globalization and Poverty, University of
  Chicago Press, available on the web at
  www.nber.org/books/glob-pov

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Country Case Studies Using Household Data

• India (Topalova)
• Colombia (Goldberg and Pavcnik)
• Ethiopia (McMillan and Levinsohn)
• Mexico (Ashraf, McMillan, Peterson-Zwane Hanson)
• Zambia (Balat and Porto)
• South Africa (Levinsohn)
• China (Ligon)
• Poland (Goh and Smarzynska)
• Indonesia (Thomas)

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Key Results from Case Studies

1. Simple conclusions misleading
2. Heterogeneity in responses
3. BUT generally true that poor in expanding sectors
   gain
4. Poor in previously protected sectors lose
5. Financial Integration DFI and Aid help the poor,
   while currency crises hurt the poor
6. Bundling trade reform with complementary policies
   is key

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Why are conclusions based on HO models wrong?

• HO Orthodox view in countries with a
  comparative advantage in exporting
  unskilled-intensive goods, unskilled or poor will
  gain more from trade than skilled workers (Anne
  Krueger, Jagdish Bhagwati)
• Why is this framework incorrect? Violation of
  assumptions behind the Heckscher-Ohlin model
• Workers cannot easily relocate to expanding
  sectors
• Countries protect sectors more that use unskilled
  labor
• Exporters/foreign firms use skilled labor even in
  unskilled-labor rich countries
• Getting goods produced by poor (or using their
  labor) to global markets requires many
  complementary policies (infrastructure, human
  capital development etc)

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What do we mean by heterogeneity in responses ?

• Mexico large corn farmers gain, small corn
  farmers lose (from US corn imports)
• India tariff reductions associated with slower
  rate of poverty reduction BUT
• Only true in regions with restrictive labor laws
• No impact on poverty reduction in regions with
  mobile labor

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BUT generally true that poor in expanding sectors
gain

• Unskilled in countries with a comparative
  advantage in exporting unskilled intensive goods
  to rich countries (Poland)
• Poor wage earners in sectors receiving DFI
  (Mexico, India, Poland)
• Poor wage earners in sectors with export growth

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Poor in previously protected sectors lose

• The poor in urban sectors with tariff reductions
  (Colombia)
• Small farmers competing with higher imports
  (small corn farmers in Mexico)
• Rural agricultural labor restricted from
  relocating due to rigid labor laws (India)

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Lack of labor mobility documented in these
studies suggests poor may lose from trade
liberalization

• Fact that poor in expanding sectors gain (export
  sectors) and poor in contracting sectors lose
  (importing sectors) suggests that
• Traditional trade models which suggest that labor
  gains from trade liberalization in poor countries
  are inappropriate
• Right model is specific sector model
• Lack of labor mobility is critical for
  understanding impact of trade reform on the poor.

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Two Illustrative Case Studies (see www.nber.org)

• India and Colombia
• Outcomes different poverty and inequality
  measures
• Policy focus trade reforms
• Results trade reforms only hurt the poor IF
  labor markets are inflexible

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Study on India (Petia Topalova)

• Regress district level outcome on a
  district-level measure of trade exposure, defined
  as the average of industry-level tariffs weighted
  by the workers employed in that industry in 1991
• Ydt a bTariffdt cFDIreforms dt ed
  edt
• Outcomes Ydt include proportion of population
  below poverty line, poverty gap, and inequality.
• Author finds negative and significant coefficient
  b, implying tariff declines increase poverty in
  rural areas
• BUT negative coefficient on tariffs ONLY in
  regions with inflexible labor markets.
• Coefficient on FDI lt 0, implying FDI helps the
  poor.

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Study on Colombia (Penny Goldberg and Nina
Pavcnik)

• Use household data
• They measure the impact of changes in
  globalization (measured as tariffs or imports and
  exports) on the following outcomes for urban
  workers
• Movements into the informal market
• Poverty incidence
• Skilled-unskilled wage gap
• Unemployment

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Typical estimating equation

• Outcome aTAR ßTARLABREG µZ
• Outcome unemployment/informality/ poverty
• TAR tariff in sector where individual
  employed, instrumented using initial
  period tariffs.
• LABREG Extent of labor regulations
• Z Age, experience, education

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Results for Colombia (Goldberg and Pavcnik)

• Tariff Protection associated with less
  informality, less poverty, less unemployment
• Import competition associated with more
  informality, more poverty
• Export activity associated with less
  informality, less poverty

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Goldberg and Pavcniks approach to labor markets
and poverty

• Allow impact of tariffs (or import penetration
  and export activity) to vary depending on labor
  market regulations
• Tariffs only protect workers from informality
  prior to the reforms
• After the labor reforms, export activity has a
  bigger positive impact in moving workers out of
  the informal sector
• Importance of interaction term (TARLABREG)
  suggests that relationship between globalization
  and labor market outcomes depend on labor
  institutions

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Policy Implications of NBER Study

• Bundling trade reforms with complementary
  policies more likely to produce gains for the
  poor
• Lack of labor mobility impedes adjustment
• Lack of complementary inputs inhibits movement
  from subsistence agriculture to cash crops for
  export
• Lack of domestic institutions, rule of law,
  capital market development restricts gains from
  access to international capital markets
• Since poor in import competing sectors lose from
  trade reform, income support programs needed
• Since poor in export sectors gain, access to
  developed country markets is critical

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Issue 2

• What about direct labor market interventions to
  combat poverty? (minimum wages, anti-sweatshop
  movements)
• Is there a trade-off between wage gains and
  unemployment?

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Indonesian Case Study

• In Indonesia, US threats to withdraw GSP status
  due to violations of worker rights led to
  enormous minimum wage increases (800 percent)
  during the1990s.
• The anti-sweatshop campaign against Nike
• targeted the lowest paid workers
• Measuring the impacts wages versus employment

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Methodology to Identify Impact of US-mandated
minimum wage increases and anti-sweatshop
campaigns in Indonesia

• Minimum wage effects use regional variation in
  minimum wages
• Anti-sweatshop campaigns compare sectors
  (textiles and apparel) and regions where targeted
  firms (Nike) operated relative to others.
• Econometric techniques
• Difference in differences
• Matching estimators

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Approach

• Wi96 Wi90 a1MinWAGErit
• a2ACTIVISMi,1990 a3 Zit ?r eit
• W wage or employment changes in logs
• MinWage minwager,96 minwager,1990 in logs
• Activism anti-sweatshop activity in region
• Z worker and/or plant controls
• i,r,t plant i in region r at time t
• ?r Region controls

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Results on Indonesian Case Study

• Minimum wage increase associated with 35 percent
  increase in production worker wages suggests US
  threats to eliminate GSP effective.
• Anti-sweatshop activism successful Exporting
  and foreign textiles and footwear producers
  increased wages 20 to 25 percent faster than
  others
• Upward pressure on wages generated through
  anti-sweatshop campaigns did NOT affect
  employment
• BUT minimum wage increases cut employment by 10
  
• Anti-sweatshop activism also associated with
  falling profits, investment, some reduced entry,
  greater exit
• Suggests costs to intervention, but
  anti-sweatshop campaigns probably a better
  approach

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Conclusions

• Orthodox prescriptions claiming that poor gain
  from trade reforms are misleading because workers
  cannot easily relocate from contracting to
  expanding sectors.
• Specific sector modelwhich assumes that workers
  are stuck in the short run--is more realistic,
  at least according to case studies in my
  forthcoming NBER study.
• Poor in expanding sectors gain and poor in
  contracting (import-competing) sectors
  loselargely a consequence of labor immobility
• While some forms of labor market interventions
  are costly in terms of foregone employment
  (minimum wages) other types of interventions
  (such as anti-sweatshop campaigns) have led to
  improved working conditions and pay

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Issues for Further Study

• Which type of labor market interventions help the
  poor? (Right to organize, anti-sweatshop
  campaigns)
• Which labor market interventions hurt the poor?
  (entry and exit barriers, minimum wages)
• Which complementary policies are most critical
  for ensuring that trade reforms help the poor?