Assessing and addressing the employment effects of trade : A knowledge sharing workshop International Training Centre of ILO, Turin, Italy. Samuel G. Asfaha ITC-ILO Assessing and Addressing the Effects of Trade on Employment : A Knowledge Sharing Workshop Jakarta, Indonesia , July 2010 Trade and Labour Market Adjustments

International Training Centre of ILO, Turin, Italy. Learning objectives To map out trade-induced labour market adjustment costs To compare long-term gains and short-term costs of international trade To understand controversies on how big and important adjustment costs are in theoretical and empirical economics literature To map out the scope for policy interventions

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. Outline Trade as a source of adjustment costs Traditional trade theory in glimpse The Hecksher-Ohlin / Stolper – Samuelson predictions Adjustment costs in economics paradigm ‘Smooth labour market adjustment hypothesis” Types and speed of adjustment costs Short term adjustment vis-à-vis long term gains Policy options Adjustment options in WTO

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. Trade as a source of adjustment costs: Exogenous trade-induced shocks –E.g. change in price (due to change in demand, change in factor endowments, changes in technology etc), e.g. is trade as transmission channel of external shock Endogenous trade-induced shocks –E.g. change in trade policy (tariffs, subsidies etc.) Empirically it is difficult to isolate the two types of adjustment sources.

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. Traditional trade theory - A glimpse The traditional trade theory’s prediction that trade liberalization leads to a long-term gain is widely accepted. The fact that trade creates winners and losers is also fully accepted. The national welfare gain is often explained by what is called the Samuelson compensation principle: –The winners gain enough from liberalization to allow them to fully compensate the losers without exhausting all of their gains, i.e. the overall national gain from trade liberalization is bigger than the loss!!

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. Recall, what the traditional theory (for example the Hecksher-Ohlin theory) says about inter-sectoral resource reshuffling!

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. Traditional trade theory – A glimpse The HO theorem: –Countries export goods that intensively use their abundant resources and import goods that need intensive use of their scarce resources –So it shows patters of specialization The Stolper-Samuelson theorem: –Built up on the HO model to predict patterns of employment and the income distribution effects of trade.

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. The Hecksher-Ohlin / Stolper- Samuelson predictions In unskilled labour intensive country, the demand for skilled labour decreases –But, what if trade openness leads to a decline in the cost of capital and intermediary goods? –Intense post trade-reform competition accelerates the process of switching to more skill-intensive technologies

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. The theory predicts that trade induces inter sectoral factor market (including labour market) adjustments in the short-run with resources moving to expanding sectors.

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. But, what are the adjustment costs of such inter-sectoral shifts?

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. Do all workers and capital in the losing sector get employment in the gaining sector, and at a comparable or better pay and other working conditions?

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. But: How fast and costly are the adjustments? –Could it be slow and lead to long term unemployment or chronic underemployment?

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. What factors could hinder or facilitate the adjustment processes and how could governments best assist workers displaced by trade to re-integrate into the labour market?

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. Does different trade patterns induce different adjustment costs? –E.g. intra-industry vis-à-vis inter-industry trade; North-South vis-à-vis South-South trade; trade in goods vs. in services …

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. Adjustment costs in economics paradigm Among mainstream economic thinking, concerns on labour market adjustments have been seen as misguided: –Employment effects of trade are small; –Adjustments are fast and costs of adjustments are small compared to aggregate gains from trade But, these views have been increasingly questioned both on theoretical and empirical grounds.

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. “smooth labour-market adjustment hypothesis” Smooth adjustment hypothesis – –Adjustment pressures are negatively related to the share of intra-industry trade in the expanded trade flow. –Simply, intra-industry trade entails lower costs of labour market adjustment than inter-industry trade. What is the rationale behind? originally suggested by Balassa (1966) now a widely accepted concept..

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. Smooth adjustment hypothesis.. Cont’d Powerful intuition behind it. Not extensive empirical support yet –studies exclusively focused on Western European countries and in manufacturing industries.

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. Types of adjustment costs In reality, long term trade reform opportunities come with short-term adjustment challenges (costs): –firm closures, –workers displacement, –Wage and/or job losses, –tax revenue losses, etc.

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy.

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. The empirical literature is yet to address this issue A hint in the literature (by Trefler 2001) shows an adjustment speed of 7 years in the case of US – Canada FTA Speed of adjustment

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. Short-term adjustment costs as percentage of long-term gain The bulk of the empirical literature shows that adjustment costs are very small compared to long term gains, however there are significant differences: –Magee (1972): 2-4 per cent. –Baldwin, Mutti and Richardson (1980): 4 per cent. –Melo and Tarr (1990): 1.5 per cent. –Winters and Takacs (1991): 0.5 – 1.5 per cent. –Davidson and Matusz (2000): 80 per cent. –McMillan, Rodrik and Welch (2002): > 60 per cent.

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. Short-term adjustment costs as percentage of long-term gain Why such huge differences in the results ? –Difficulty of measuring adjustment costs!!!! –Diffculy of isolating trade-induced adjustment from technology-induced and other adjustments –The variation in the result may reflect differences in methodology used and assumptions made –Much of existing empirical work is rather crude and imprecise. Are the results robust? –Empirical evidence is restricted to industrialized countries. Can the results be extrapolated to developing countries?

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. Despite, the differences in the result, the bulk of the existing evidences show small adjustment costs. Why then are policy makers and the public are continuously concerned about them? Short-term adjustment costs as percentage of long-term gain

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. Policy options for trade adjustment Credit market and social safety nets Labour market adjustment measures –Unemployment benefits, Employability and skills enhancing measures Gradual liberalization Export promotion measures

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. Adjustment measures in WTO agreements/negotiations “Safeguard” measures –To protect domestic firms/producers from sudden import surges following trade liberalization –Threshold for triggering “safeguard” measures are based on “volume” of imports (volume triggers) or drop in domestic “prices” (price- trigger)

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy. Adjustment costs Trade-induced adjustment costs are serious concerns in many countries, yet little empirical knowledge, especially in developing countries, exists on: –Size of adjustment costs –Speed of adjustment –Distributional impacts of the adjustment costs –Etc …

Trade and Labour Market Adjustments International Training Centre of ILO, Turin, Italy //