1 CHAPTER 3:TRADE AND EMPLOYMENT 3A: Wage rigidities 3B: Imperfect labour mobility, labour turnover, efficiency wages 3C: Labour market institutions, comparative advantages and unemployment 3D: Empirical evidence Globalisation and labour markets, H. Boulhol 1

3C: Labour market institutions shape comparative advantages Labour market institutions affect employment levels and factor prices … … hence contributing to specialisation (even in autarky), comparative advantages and trade flows 3A and 3B: minimum wage (Davis, 1998), turnover (DMM, 1999) Burgeoning literature, 3C: Boulhol (2006, 2008), Helpman and Itskhoki (2007) + papers #

3C: Labour market regulation and relocations Boulhol (2006, 2008) Footlose capital model (Martin & Rogers, 1995) + segmented labour market (McDonald & Solow, 1985) Footloose capital model (economic geography) 2 x 2 x 2, capital internationally mobile, labour Footloose: even though capitalists can relocate their capital abroad, they spend capital income domestically Sector A: c.r.s., perfect competition, labour Sector R: differentiated good, i.r.s. (fixed cost of capital), market power, bargaining, higher wages Unemployment Rents in sector R create segmented labour markets as people searching for high-paid jobs trade-off receiving unemployment benefits (instead of low- paid jobs) against better chance to get a high-paid job

3C: Autarky (Boulhol, 2006, 2008) Labour market regulation bp ( ): workers’ bargaining power High bp: - workers capture a high share of the product market rents - capital return is lower - greater wage inequality between workers in the rent sector and workers in the other sector - high unemployment: more workers prefer to search for a good job than work with low wage

3C: Unemployment and specialisation Unemployment decreases because either LM is deregulated or economy specialises in non-rent sector Opening the economy affects specialisation

3C: Open economy Capital liberalisation with a low LM-regulated country -capital moves abroad because capital return is higher -relocations abroad of activities with high rents -specialisation in low-rent sector (higher LM regulation triggers more specialisation) Decrease in (iceberg) trade costs - amplification of relocations because it becomes cheaper to serve the domestic market from abroad

n In the open economy, the relation between LM regulation and the unemployment rate is hump-shaped due to specialisation When trade costs are sufficiently low, unemployment disappears because of full specialisation (all high-rent/high-wage activities have been transferred abroad) A likely consequence is that trade liberalisation puts pressure on labour market institutions, triggering LM deregulation

3C: Hiring costs and trade Helpman and Itskhoki (2007) Mortensen-Pissarides-type frictions (hiring costs) + Melitz model Impact of LM frictions on trade flows, productivity, unempl. 2-sector model -differentiated-good sector monopolistic competition as in Melitz: market power + hiring costs + bargaining -homogenous good, c.r.s., perfect competition

3C: Helpman and Itskhoki Two opposite effects of LM institutions (hiring costs) Good institution means: a)lower hiring costs (hence lower unemployment rate) b)b) more resources are driven in the rent-sector (hence higher unemployment rate) Unemployment rate is hump-shaped in the quality of LM institutions (even in autarky)

3C: Open economy Trade liberalisation -both countries gain from trade, but the country with lower frictions gains proportoniately more -flexible country exports the differentiated good in net -improving LM institutions in one country raises its welfare; the trading partner specialises in the homogenous good, unemployment decreases, but welfare decreases (bad specialisation) Impact on unemployment depends critically on the fact that trade impediments are higher in the sector with higher LM frictions (consequently, trade liberalisation induces an expansion of activity in the sector with the higher rate of unemployment)

11 CHAPTER 3:TRADE AND EMPLOYMENT 3A: Wage rigidities 3B: Imperfect labour mobility, labour turnover, efficiency wages 3C: Labour market institutions, comparative advantages and unemployment 3D: Empirical evidence Globalisation and labour markets, H. Boulhol 11

3D: Empirical evidence Employment is negatively affected in import-competing industries -Tariffs cuts reduced employment in the industries that were the most negatively affected by USA-Canada FTA by 15% and reduced output and number of plants by 8% -against these large short-run adjustment costs, long-run labour productivity gains of 17%, driven by contraction of low-productivity plants (Trefler, 2001) -Contribution of trade with developing countries to deindustrialisation in developed countries. Total job losses vs employment in services? (Rowthorn, Ramaswany & Couts # 13, Boulhol & Fontagné, 2005)

3D: Adjustment costs Evidence that trade liberalization increases unemployment in the short-run (Chile) Small adjustment costs associated with transitional unemployment in developed countries (Matusz & Tarr, 1999) Latin America: trade liberalisation increases employment, left unemployment (increased participation)

3D: Skill upgrading Japanese multinationals, (Head & Ries, 2000): more employment in low-income countries is associated with higher skill level of domestic employment (vertical specialisation) Some evidence that trade leads to skill upgrading and productivity gains within sectors (France, UK)

3D: Foreign outsourcing Impact of offshore outsourcing on the wage share of non production workers within manufacturing sectors (Feenstra & Hanson, 1996): -No effect between % of hte decrease in this wage share between is explained by offshore outsourcing Outward FDI seems to be associated with an increase in net exports: production in foreign and domestic affiliates would complement to each other However, firm investment abroad seems to substitute to domestic investment (but inward FDI has a net positive effect of total investment)

3D: Trade and turnover What is the direction of causality ? (Davidson and Matusz, 2005) -From trade to turnover (common view) 1)trade increases competition, drives firms out of business and threatens job security (in the manuf. sector); 2)of course trade can have positive labour market outcomes in expanding sectors In either case, trade creates or destroy jobs: more turnover -From turnover to trade « intrinsic » LM turnover has an impact on trade flows (DMM) More turnover, higher wages to compensate workers, higher production costs, less competitve, more imports Davidson and Matusz find strong evidence of correlation between rates of job losses and level of net exports, evidence of channel « from turnover to trade »