Regional Labor Market Effects of Trade Reforms - Essay Example

REGIONAL LABOR MARKET EFFECTS OF TRADE REFORMS al Affiliation) Introduction Within the last few decades, the world has witnessed a reduction in trade barriers among countries. Most countries mainly developing countries have opted from the import substituting industrialization policies by abruptly reducing the trade barriers that were in existence. It has led to more trade occurring through the world but a lot of effects have been witnessed especially at the local level. It has proved to motivate several studies seeking to find out the effects of trade reforms on numerous national labor market effects mainly labor wages and labor demand. This study seeks to find out the effects of trade reforms on labor market outcomes at the local level. The study will help in identifying the effects that trade reforms has brought to the labor wages and labor demand under the trade policy by the influence of the tariff. Labor market regulations became widespread after the end of the World War II. Several countries were dependent on international trade to improve their economies. The dependence on international trade led to the growth of trade reforms aimed at leveling the playfield for all countries to engage in international trade. The main aim of these reforms was to protect and raise the workers’ welfare within the local level. It meant more employment opportunities and therefore higher wages for the labor force within different countries. With time, trade reforms have grown to become one of the reasons behind the poor performance of labor markets worldwide. Many have argued that the employment laws in different countries are to blame for the high unemployment, rising informality, wage inequality and many other problems. This paper aims to explain how trade reforms have been the major cause to most of these problems. The globalization of the economy through trade reforms has affected different countries differently. The effects that the trade reforms have brought into the labor market for most countries vary from one country to another. The difference comes from the fact that some countries have been able to exploit new opportunities while others have been unable to maximize the use of these opportunities. The labor markets have been the most affected with the trade reforms that have been witnessed throughout the world. Some countries continue to experience a decrease in the labor wages while others continue to experience an increase in labor wages. Labor demand has also been affected by these reforms with countries witnessing an increase in labor demand while others witnessing a decrease. Jürgen (2001) suggests that labor markets have witnessed differing effects due to the trade reforms. He explains the way in which labor markets work in reference to the different segments motivated by the demand and by supply of labor. Jürgen’s theory therefore opposes the fact that politics does play a role in the segmentation of the labor markets. He claims that such schools of thoughts do not look at the underlying dynamics of the local labor market structure. It is crucial to observe the dynamics of the local labor market with reference to the trade reforms that have been done. Such reforms do not necessarily lead to equilibrium in the labor market thus making it necessary to carry out a research on this topic. Trade reforms cause several changes within the trade market. Reforms mainly lead to a reduction in the prices for goods within countries. The labor market therefore undergoes some changes based on the reduced prices that are experienced. As Kovak (2013), suggests, trade reforms have bigger effect on local wages in three scenarios. The first scenario the reforms create a bigger effect on the prices encountered by producers. The second scenario is when the trade market covers a bigger share of the local employment and the third scenario is when the labor demand in the trade market is more elastic. In these three scenarios, the effects of trade reforms are well documented and can be specifically singled out. Trade reforms occur in several ways within the trade market. They can include a huge decrease in the trade restrictions of a particular country. Here the trade restrictions that existed before get drastically removed from the market thus opening a window of more opportunities for traders. Trade reforms can also get carried out in a way that trade restrictions are reduced across several industries. Such a move would lead to a widespread cross-industry inconsistency in tariff cuts. It would make the industrial structure of the labor force of a country to differ greatly across various regions. Such a difference in tariff alterations across multiple industries and industrial structure through regions come together to bring out the effect of trade reforms on the labor wages. In a case whereby such trade reforms get carried out in a trade market, certain results can get experienced. The local labor markets whose labor force were focused on the industries that faced larger tariff cuts got mainly affected in a negative means. The labor markets that faced smaller cuts received positive effects. To analyze the situation, we look at the local labor market and the tariff cuts that it went through. In a case where by a labor market experiences higher tariff cuts, the results are that the labor market will get affected negatively. The negative effects will cause lower labor wages and lower wage demands thus reducing economic growth and causing unemployment. In the case where the tariff cuts are smaller, the labor market is likely to get affected positively. The positive effects will include higher labor wages and higher wage demands. In such a case the economy will experience an increased growth. Kovak (2013) suggests that trading causes several changes in the prices of commodities. The changes in prices are likely to have a negative effect on the local labor markets whose labor force were focused on the industries that faced larger tariff cuts. Larger tariff cuts lead to lower labor wages and demand respectively. The main cause of this is that the prices of commodities are likely to reduce thus causing more negative effects on the labor market. The negative effects are in the form of reduction in labor wages and an increase in labor demand respectively. The results include an increase in the unemployment and poverty level of a country. Local labor markets that experience lower tariff cuts on the other hand are likely to experience a change in prices of commodities. The result leads to an increase in labor wages and a decrease in labor demand thus leading to a reduction in unemployment and a reduction in poverty. Changes in prices of commodities are likely to get experienced across different industries within an economy. These price variations in the context of trade reforms are determined by tariff fluctuations. The tariff cuts affect each industry in a different way and the consequences are also different. Industries such as the agricultural industry are worst hit by these cuts. According to Tsikata et al. (2009), labor markets have a major role in the determination of poverty effects of trade reforms. Purchasers of agricultural products are likely to lose due to the higher prices of agricultural products. However, they can gain by turning these prices into higher wages and more job opportunities. In such a case, labor markets play a major role in ensuring balance in the demand for labor as well as the supply. Lower wages also have a major impact on the labor market. According to Jürgen (2001), an increase in labor wages due to smaller tariff cuts is likely to attract more labor force in the market. High labor wages is likely to cases a higher labor demand and therefore attracting more labor force. Immigration allows workers to move from one country to another thus causing either an increase or decrease in labor demand. A decrease in the labor wages due to higher tariff cuts causes the labor force in the local labor market to seek for alternatives. Such alternative includes immigrating to countries that have higher labor wages. Such a scenario leads to a decrease in the demand for labor in the local market while increasing demand for labor in another area. The issue of unemployment has been increasing greatly across different countries. Developed countries such as the US and other European countries have experienced a higher increase in unemployment compared to the developing countries mainly in Asia. The main reason for this difference is that the labor demand across the developed countries has been declining within the past few years. The decline in labor demand has been mainly due to the trade reforms that have been carried out throughout the world. The reforms have created trade openness and therefore causing a relationship to the unemployment level. The decline in labor demand also has a direct impact on the labor wages. Developed countries therefore have a falling labor demand due to the increased trade triggered by the trade reforms while developing countries are affected in a positive way. The developing countries therefore experience higher demand for labor due to the trade reforms. The higher demand for labor leads to higher labor wages within the local market. Trade reforms have also triggered increased employment in a number of African countries. According to Alessandro Turrini’s (2002), employment increased after trade reforms had been carried out during the period of 1980 to 1997. The employment changes occurred from larger industries to small firms within countries. The increase in employment was also witnessed in Latin American countries such as Costa Rica, Peru and Uruguay. Asian countries also witnessed an increase in employment due to the trade reforms. However, developed countries mainly in Europe reported a decrease in the level of employment. The reduction in employment leads to a reduction in labor wages and vice versa. Restrictive or unfitting labor regulations have proved to be one of the labor market crucial-matters in a host of countries (Cho, Margolis & Robalino, 2012). They claim that trade causes the demand for labor to become elastic and as a result they become less rigid. The lower rigidity has a direct impact on the employment level in a positive way. The labor wages also get affected by the productivity or output demand shocks thus leading to a decrease in employment rate. Restrictive labor regulations act to impact trade negatively therefore reducing labor demand. It also acts to reduce labor wages as the reduction in demand increases unemployment. Labor market regulations are another factor that affects trade reforms. The main aim of carrying out labor market regulations is usually to safeguard and advance the workers’ welfare. Worker’s welfare is an important factor in any industry. The worker’s efforts needs to get appreciated and they should be safeguarded. Labor market regulations therefore should be enacted to safeguard the worker’s interests. Such interests may be in the form of labor wages. All workers need the surety that they will get compensated for the services they render. The compensation is usually in form of the labor wages. These wages should also be in line with the trade reforms to ensure the rights of the workers are not infringed. Labor market problems are some of the consequences of trade reforms that are affecting people at the local level. One of the main reasons for labor market problems is the high unemployment rates witnessed in a number of countries. The absorption rate for youths is also a major problem for most labor markets and this has led to an increase in labor market problems. Rigid labor markets also play a role in ensuring trade reforms undergo several problems within the local market. there is need to address these labor market problems so as to be able address the problems facing workers at the local level. The efforts should concentrate on enhancing labor wages as well as labor demand. Addressing these two issues will help in ensuring the effects of trade reforms are minimized in the local level. The issue of trade reforms has been a major topic of discussion across the international world. Most developing countries believe trade reforms are likely to create job losses in import-competing sectors in the economy. Most developed countries are concerned about the relationship that exists between the increase in import goods within their countries and the continued increase in labor-market inequalities. The answer to these questions lies in the link between international trade and the local labor market. The performance of labor markets is mainly dependent on trade. The reforms carried out must be made in a way that they enhance the labor market through increasing labor demand and labor wages. In conclusion, we find out that local labor markets whose workers are concentrated in industries facing the largest tariff cuts will be more negatively affected. They are likely to experience lower labor wages that will in turn lead to an increase in poverty within the country. Markets facing smaller tariff cuts on the other hand will most likely get affected positively. They will have higher labor wages and thus a reduction in poverty. Higher labor wages are likely to attract workers from other countries. It causes immigrations that in the process leads to a reduction in labor demand in the countries these workers are coming from. This relationship takes the form of a weighted depend on the industrial distribution of workers in each region and labor demand elasticity in each industry. Trade reforms therefore affect different countries in a different way. There are those countries mainly developing countries that have gained from such reforms and this is evident in their local labor markets. Other countries mainly developed countries have been negatively affected by these trade reforms. References Cho, Y.,D. N. Margolis and D. A.Robalino. (2012). “Labor markets in low and middle income Countries : trends and implications for social protection and labor policies.” Social Protection Discussion Papers No 67613, The World Bank, March. Jürgen, W. (2001). Economic Reforms, Growth and Employment: Labor Markets In Latin America And The Caribbean, Santiago, Chile, 2001. United Nations Publication, LC/G.2121-P, ISBN: 92-1-121292-8 Kovak, B. (2013). Regional Effects of Trade Reform: What is the Correct Measure of Liberalization? American Economic Review 2013, 103(5): 1960–1976 Web. http://dx.doi.org/10.1257/aer.103.5.1960 Tsikata, Y. M., Moreira, E. P., Hamilton, P. C., World Bank. Organization of American States. & Caribbean Forum. (2009). Accelerating trade and integration in the Caribbean: Policy options for sustained growth, job creation, and poverty reduction. Washington, D.C: World Bank. Turrini, A. (2002). International Trade And Labor Market Performance: Major Findings And Open Questions. United Nations, New York and Geneva ISBN 92-1-112558-8 Read More