Relationship between Employment and International Trade - Essay Example

Theories claim that there exists a strong relationship between employment and international trade. According to various trade theories, international trade helps in augmenting employment level of a country. Increase in employment is one of the gains from trade. This paper has tried to find out whether this holds true in real world. The study has employed a two fold method to find out the effect of trade on labor. First, it has conducted a through research of the findings of the existing empirical studies that discuss the effect of trade on employment. Then it has collected some data of international trade volume and unemployment rate of a developing and a developed nation to find out whether any strong relationship does exist between the two variables. On the basis of its research, the study has come to the conclusion that trade does not significantly affect labor market in real world. Introduction: According to the Economic theory, we know that there are gains from trade. But these gains are reflected as net gains. Despite there been a secular increase in both exports and imports and has been regarded as a percentage of Gross National Product which is considered to be beneficial for the economy and also though the increased exports have generated additional employment opportunities, but still these changes have been accompanied by reduced employment opportunities and adjustment burdens for workers in import-competing industries. The workers had to adapt themselves to the new working environment of changing demand conditions in the import competing industries which involve extended periods of job research, restraining and relocation which demands to be a bit costly venture. As per the analysis, women and the minorities, the less educated and the lower paid groups, as compared to men, had to take more burdens on themselves and they were not in a position to afford the cost even. Since the last two decades, quite a number of developing countries have undergone liberalization of their trade regimes. The proponents of such liberalization have argued that one of the chief beneficiaries of greater openness to trade is the workers in these countries. Basically, trade liberalization with abundant supply of labor has encouraged producers to reallocate output towards labor intensive goods. Hence the resulting increase in the demand for labor, given the labor market conditions, has translated into some condition of an increase in employment and wages. The logic behind this argument has been totally justified and compelling and has been supported by the proponents of early liberalization as the Newly Industrialized Economies of East Asia like Hong Kong, Korea, Singapore and Taiwan. According to Robbins in the year 1996, and Wood in 1997, recent episodes of trade liberalization have appeared not to have been associated with large improvements in prospects for the typical worker. The apparent divergence between the expectations of liberalization advocates and the recent evidence has been explained by various factors. For example, the liberalization in trade has lead to an inflow of new technologies from abroad. But in this case, the growing evidence suggests that the new technologies are increasingly skill biased and therefore according to the recent episodes of trade liberalization that may lead to an increased demand for workers but that will comprised of less number of workers who are highly skilled, as per Wood in 1997. ( Wood, 1997) On the other way, the available evidence may be incomplete in some important ways. As for example, it has been highly observed that the short run effects of liberalization are likely to be adverse for aggregate labor, even among the proponents of trade liberalization. It takes a lot of time for resources to get reallocated in new firms and industries and it is also possible that the available time series is not enough to capture the effects of trade fully. In a similar way, the number of countries that have been taken into observation may not be the most appropriate ones. Many recent studies have focused on the experience of Latin American countries as they found limited benefits from trade liberalization for a typical worker. (Suryahadi, 1999; Kambhampati, Krishna and Mitra, 1997; Edwards and Edwards, 1994) Review of literatures: The analytical framework, which is used most commonly for making clear the understanding of the links in between labor oriented market and trade, is given by the model of Hecksher - Ohilin model in that of international trade. Here two countries are assumed with two driving factors such as the labor and capital. even here, we get two good versions for the given model form the movement of autarky where the trade was associated with both countries with a huge increase in the relative prices for more labor intensive of goods shall increase in a country where there is labor abundant seeking profit oriented firms. Hereby just the opposite takes place where the capital in a country is very high. Such vital changes bring about a increase in demand of labor in labor which is abundant in countries. If we assume the model with full employment with an increase in the demand for the huge labor turns into higher wages: keeping these assumptions in mind the demand should be allowed with the increase of labor in combination with some increment in the employment factor. The wages with precise magnitude depends on the conditions of the market of the labor and the countries economy. (Wood, 1996) The H-O model should be made keeping in mind other restrictive consumptions, where the basic concept of the model should be in order that the inelastic supply of the labor should depend on conditions prevailing in some countries. This supply should be characterized by an effective intangible supply at prevailing stages of wage in those sectors, which are tradable. If the shifts were made rightward then the demand of the labors in case of liberalization of the trade would result in higher employment but not in the increase in the wages.(Levinsohn, 1999; Wood, 1996) Critically stating realizing the gains of the trade requires those factors, which act as real obstacles for the competing sectors of the import to that of the export sectors. If all these factors account to be immobile in nature then the liberalization of the trade can give some counter productions. Treatment of such factors specifically tend to point on capital which is immobile in short run (which causes the wages to decrease sharply. It is true that the labor would move anywhere as if the standard H-O models do give some pre handed suggestions. (Wood, 1996) If one begins with the process of finding a new job, the growing sectors might not look like trivial in nature. Searching for a job is time taking and there are workers who do possess sectors and firms, which become difficult for replacement. If we put it another way, job creation in a way leads to job destruction or vice versa through significant period. (Rama, 2001, Rama, 1994) There is another level where the labor markets operate under government regulations like collective bargaining, minimum wages, etc. This model does provide the protection of the workers from different sectors of the market. There are economists who do believe that these regulations do introduce distortion. (Wood, 1996) Legislations are there where work for the lay off workers is difficult. Such case is seen in large-scale factories, which impinges later on firms, which relocates resources for new production lines. This may be also the cause of the firms to get on fewer workers otherwise. It is made to such an extent that these regulations are disregard and are not spread in a widespread condition. These regulations dilute the benefits of the reforms made in the trade. (Baldwin, 1995) Minimum legislation on wages is banned often to encourage more of employment. Finally, we see that if we go in for unionization of labor will help in the improvement of the labor market. It is in a way the outcome shall improve. Rama pointed out correctly that trade protection shall improve upon the power of the market, give out rents for all those domestic firms, and later on capture these rents in form of wages. The opposite takes place if there is no unionization of labor. It might also happen that a union may go in for bargaining for the protection of their wages just at the cost of employment, in such cases collective barraging might work fruitfully but it is against the model driven by H-O where the liberalization of the trade might increase in the abundance of labor in those countries. (Baldwin, 1995; Wood, 1996) Findings and Discussion: It would be quite interesting to find out whether the effect of trade on labor in practice matches what theory claims. This study will consider the effect of trade on labor in real world. For this purpose, this section will consider a two fold method. It will first look into the findings of various existing empirical studies that take into account the effect of increasing trade on labor force participation, employment structure, etc. and discuss those findings in light with claims of existing theoretical literatures. Thus the present research method is particularly based to a large extent on rigorous review of the findings of existing empirical studies in the relevant field. Additionally, the paper will look into the trend of trade and employment rate in a developed and developing country to find out the effect of trade on labor. For this purpose, USA will be chosen under the category of developed nation and India will be chosen under the category of developing nation. For the purpose of this study, the trend of trade in terms of net exports and employment rate will be looked at for the last 10 years. Baldwin provided comprehensive survey on various impacts in 1995 for liberalization on trade, which was based on employment. The employment factor was for the OECD countries. The study first show that the effects of net employment in imports and exports have not shown a positive graph in OECD countries. Secondly, the effects of trade have produced adverse effect significantly in labor-intensive industries. Kruger in the year 1983 gave a summary on linkages of various trade policies. The conclusion of the study reveals a fact that trade policies would turn out to be more labor intensive if the move is neutral. However, keeping this study in mind Hanson and Harrison in 1999 found that there will be an increment in employment if there is proper trade reform Data available from Latin America reveals the modest impact of the liberalization of the trade especially on wages and employment. Rama in the year 1994 used a four digit data, to study the huge impact of liberalization on trade and employment in Uruguay. The result forecasted that for 1 percent decline in the rate of protection led to 0.4 – 0.5 percent decrease in employment pertaining to the same year. Ravenga in the year 1994 tried to find out the impact on reduction of tariff and the coverage of quota of employment on the level of firm in Mexico. The estimate revealed that reduction of tariff had no impact as such on employment. However the reduction on quota coverage from a high range of 90 percent to 10 percent is directly associated with a decline of 2-3% in employment. Harrison and Currie in 1997 found out that almost all manufacturing firms running throughout Morocco remained unaffected due to reduction in tariff and quota elimination. According to Erlat (2000), imports and exports in Turkey have enabled some changes in employment. However, they found that change in employment was not made only by trade, but also through productivity change and domestic consumption. Zoabi and Saure (2008) gave another paper analyzing the impact of contraction and expansion of the sectors on intensive use of female labor and their participation. If the trade expansion is international and it is conductive to the employment of female, the participation of labor force drops down. The reason is that the male counterpart earns more than the female and hence they are employed formally. But if the condition is so that in an economic sector intensively uses female labor, the other sectors do contract and the movement of the male goes to the expanding sectors hence in this way the female workers are driven out from formal employment tactics. These mechanisms are applied in technological progress, which in a way biased towards female workers. If the technological progresses are biased in case of, FRAS then wage increases. On the basis of the findings in existing empirical studies, it can be said that contrary to the theoretical expectation, in practical world international trade has not able to produce much significant impact on the labor market. It would be now quite interesting to find out whether there exists any significant relationship in the trend of international trade and employment level in the developing as well as developed nations in the last decade. For this purpose, this study has considered USA under the category of developed nation, whereas it has chosen India under the category of developing nation. In order to consider the trend in international trade in the last decade in the two chosen countries net trade in goods and services will be considered for the period of 2000-2009. On the other hand, unemployment rate for the period of 2000-2009 will be looked at. Figure 1 and 2 show scatter diagrams for USA and India, respectively that represent the relationship between net trade volumes and unemployment rate in the two countries. Figure 1 Figure 1 shows that during the period of 2000-2009, no significant relationship exists between net trade volume and unemployment rate in USA. Thus it can be said that there did not exist any significant relationship between international trade and employment status. Thus, employment in USA during 2000-2009 was not quite dependent on international trade. Figure 2 Figure 2 shows that during the period of 2000-2009, no significant relationship exists between net trade volume and unemployment rate in India as well. Thus, there did not exist any significant relationship between international trade and employment status. Hence, changes in employment in India during 2000-2009 can be explained by changes in net trade volume. Conclusion: This paper has tried to figure out the impact of trade on labor. In this effort it has tried to examine whether trade produces effects on employment status in the way trade theories claim. For this purpose, the study has conducted a rigorous research of the findings of various empirical studies that have tried to show the effect of trade on employment status in practical world. Apart from this, the study has also uses data of net trade and unemployment for a developed and a developing nation to examine whether there exists any strong relationship between the two variables. On the basis of the findings of existing empirical studies, it can be concluded that in practice international trade does not have produced much significant effect on employment level of the over all economy as well as in sector specific ways. Even if in some cases increases in employment and trade have occurred simultaneously in some countries in some periods, but international trade was not the sole explanatory variable. In fact, there were other factors that produced more significant effects on employment than trade. The data of net trade and unemployment for the period of 2000-2009 in USA and India have not shown any strong relationship between the two variables. Thus it can be concluded that trade can not produce much significant impact on the employment of a country in real world. References: 1. Edwards, A. C. and S. Edwards. 1994. Labour Market Distortions and Structural Adjustment in Developing Countries. Susan Horton et al. (ed.), Labor Markets in an Era of Adjustment, Volume 1, EDI Development Studies, The World Bank, Washington DC. 2. Kambhampati, U., Krishna, P. and D. Mitra. 1997. “The Effect of trade policy reforms on labor markets: evidence from India”, Journal of international trade and development, 6(2) : 287-297. 3. Suryahadi, A. (1999). “Wage inequality between skilled and unskilled labor in Indonesian manufacturing”, Economics and Finance in Indonesia, 47(3): 271-288. 4. Wood, A. 1997. “Openness and wage inequality in developing countries: the Latin American challenge to East Asian conventional wisdom”, The World Bank Economic Review, 1(1). 5. Erlat, G. 2000. "Measuring the Impact of Trade Flows on Employment in the Turkish Manufacturing Industry", Applied Economics, 32(9): 1169-1180. 6. Saure, P. and Zoabi, H. 2008. Effects of Trade on Female Labor Force Participation. Retrived from www.econ.bgu.ac.il/seminars/monaster/.../May%2013-2010.pdf on 23rd April, 2011. 7. Harrison, A. and G. Hanson (1999). " Who gains from trade reform? Some remaining puzzles," Journal of Development Economics, Vol 59: 125-154. 8. Krueger, A.O., (1983). Trade and Employment in Development Countries. Univ. of Chicago Press,Chicago. 9. Rama, M., (1994). The labor market and trade reform in manufacturing. In: Connolly, M., de Melo, J. (Eds.), The Effects of Protectionism on a Small Country. World Bank Regional and Sectoral Studies, Washington, DC. 10. Revenga, A., (1994). Employment and Wage Effects of Trade Liberalization: the Case of Mexican Manufacturing. Paper Prepared for World Bank Labor Markets Workshop. 11. Currie, J., Harrison, A., (1997). Trade reform and labor market adjustment in Morocco. Journal of Labor Economics. 12. Levinsohn, J. (1999) "Employment responses to international liberalization in Chile," J. of International Economics, 47:321-344. 13. Rama, M. (2001). “Globalization and Workers in Developing Countries,” Background paper for World Bank (2002) Globalization, Growth and Poverty. Oxford. 14. Wood, A. (1996). “ Trade and Employment Creation: Possibilities and Limitations,” in OECD. 15. Baldwin, R. E. (1995), “The Effects of Trade and Foreign. Direct Investment on Employment and Relative Wages”,. OECD Jobs Study Working Papers, No. 4, OECD. Appendix: Table 1: Net trade volume and unemployment rate in USA 2000-2009 Year Net trade (exports - imports) unemployment rate 2000 ($378,784,300,000.00) 4.2 2001 ($364,394,000,000.00) 4 2002 ($420,525,200,000.00) 5 2003 ($494,182,400,000.00) 5.8 2004 ($609,347,400,000.00) 6 2005 ($714,178,200,000.00) 5.5 2006 ($759,245,400,000.00) 5.1 2007 ($702,098,100,000.00) 4.8 2008 ($698,804,300,000.00) 4.6 2009 ($374,908,600,000.00) 7.2 Table 2: Net trade volume and unemployment rate in India 2000-2009 Year Net trade (exports - imports) unemployment rate 2000 ($13,143,490,000.00) 8.7 2001 ($9,180,938,000.00) 8.2 2002 ($5,122,207,000.00) 8.8 2003 ($8,164,091,000.00) 8.8 2004 ($14,960,250,000.00) 9.5 2005 ($27,276,340,000.00) 9.2 2006 ($31,769,960,000.00) 8.9 2007 ($38,703,710,000.00) 7.8 2008 ($76,407,920,000.00) 7.2 2009 ($69,213,840,000.00) 6.8 Read More