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

3B: Imperfect labour mobility Previous models rely on perfect labour mobility between sectors However, when a worker loses a job in import competing industries, it might take time before she finds another job in export / non-tradable sectors An extreme case is specific factors models (Jones & Samuelson), that provide useful insights for the analysis of short-term impacts

3B: Specific factors Realistic property: resources cannot move immediately and costlessly between from one sector to another, one geographical location to another Many factors are specific in the short run: industries differ in the factors they demand Example beer vats vs stamping press are short-term factors the corresponding long-term factor is capital

3B: Specific factors (continued). Distinction between short run and long run is very important in practice: SPEED OF ADJUSTMENT IS CRITICAL Orders of magnitude -average US labour: 6 years When a US state hits econ. difficulties, workers leave for other states; within six years the unemployment rate falls back to the national average (Blanchard & Katz, 1991) - typical specialised machine: years - shopping mall, office building: 50 years HOWEVER, LABOUR WITH VERY SPECIFIC SKILLS CAN BE STUCK LONGER

3B: Specific factors (continued) Specific factors model and income distribution Main feature: a specific type of labour is attached to a particular sector. Interesting implications for less extreme situations (differences in turnover rates across sectors)

3B: Structure 2 goods x 3 factors ( 2 specific, 1 mobile) For example: -agriculture: land (specific) + labour (mobile) -manufacture: capital (specific) + labour (mobile) Output shares depend on the allocation of the mobile factor across sectors Trade between two countries depends on comparative advantage Comparative advantage is influenced by relative endowments in specific factors

3B: Changes in relative prices What is the effect of an increase in p1 / p2 ? -more resources are brought in sector 1 -price of the specific factor in sector 1 increases relative to p1 (and thus in real terms) -price of the specific factor in sector 2 decreases relative to p2 (and thus in real terms) -price of the mobile sector increases relative to p2, but decreases relative to p1: ambiguous effect in real terms depending on the composition of their consumption basket

3B: Gains / losses from trade Trade benefits the factor that is specific to the export sector of each country Trade hurts the factor specific to the import-competing sector of each country Trade has ambiguous effects on the mobile factor Overall gains

3B: Davidson, Martin, Matusz (DMM, 1999) Important differences in turnover rates and adjustment costs across countries (more or less “flexible” labour markets) recruiting, hiring, training, firing, etc. Turnover costs influence equilibrium prices and affect the pattern of trade Trade and search generated unemployment -Determinants of comparative advantage must include features of the labour market, such as turnover rates Distributional effects are between Stolper-Samuelson impacts and those of Specfic Factors model

3B: Intuition in DMM Search generated unemployment implies that, for each factor, trade generates distributional effects also between searching (i.e. unemployed) and employed factors Extension of Stolper-Samuelson results …, however, for searching factors Search costs create de facto an attachment of employed factors to the sector in which they are employed, hence a specific factor flavour For employed factors, total effect combines SS and specific factor effects. That is, the sector in which it is employed matters

3B: Example Assumptions: 2 sectors, 2 factors: high-skilled, low-skilled full employment for high-skilled labour search cost unemployment for low-skilled labour Trade between North and South Results: - Skilled labour gains unambiguously - (Low-skilled) unemployed lose unambiguously -What is the effect for low-skilled employed workers? total effect combines SS effect (i.e. a loss) + change in relative prices of the good they produce, which means 1)Employed workers in low-skilled intensive sector lose 2)Ambiguous effect for employed workers in low-skilled intensive sector : SS (-), specific factor effect (+)

3B: Explanation When time and effort are required to find employment, an existing job creates a sectoral attachment: - employed workers are reluctant to quit their jobs to search for new employment -matched factors are somehow like immobile factors Unemployed workers have no attachment: SS applies When jobs are long lasting and difficult to find (low turnover), attachment is greater and specific factor effects are likely to dominate Conversely, when jobs are short lasting and easy to find (high turnover), attachment is weaker and SS effects are likely to dominate

3B: Turnover and comparative advantage In a given sector, if jobs are relatively more durable or easier to get in a given country, this country will tend to specialise in that sector and export the corresponding goods. Why? Because firms will face lower costs of attracting and retaining their workers compared with their foreign rivals, hence relatively lower producer costs

3B: Efficiency wage and trade Davis and Harrigan (2007) Efficiency wage (Shapiro and Stiglitz, 1984) + Melitz (2003) Efficiency wage model LM rents and unemployment arise from asymmetric information: -firms monitor their workers’ effort imperfectly -high wages to deter them for shirking -unemployment because eq. wages are too high Heterogenous firms (Melitz, 2003) Firms are heterogenous in both their ability to monitor effort and their technical efficiency Different wages for identical workers: good jobs and bad jobs

3B: Davis and Harrigan Good jobs: high wages / generous benefits / job security Good jobs have an element of rent that bad jobs lack Impact of trade liberalisation: -firm selection effect: powerful efficiency-enhancing selection effect (lowest cost firms expand, less productive firms contract or exit) -pressure on many « good jobs » : good jobs are destroyed, number of bad jobs -inequality? -unemployment