Short Policy

Short policy paper

Yu Shi

cshi0802@brandeis.edu

Even though employment levels are not affected by trade in the theoretical model, it is not the case in the reality. In fact, jobs and employment situation are affected by trade in several ways, either positively or negatively. In this paper, the author analyzes how did trade impact jobs, wages and employment, in order to provide a better understanding of the effect of trade in labor market.

As the author suggested, trade can stimulate growth of some firms and increase their productivity, but it can also make other firms unfavorable to the market, and force them to go out of business. Also, while some of the workers are better-off in wages, some may experience unemployment. To analyze the contradiction thoroughly, the author has begun the discussion with the impact of trade on jobs by comparing importing firms and exporting firms, and with the difference in wages between trade-related firms and non-trade-related firms. Then, the author discussed the factors that impact the relationship between trade and employment. Finally, the author stated the long-term structure of employment, and how trade has affected women’s employment level.

The key economic arguments:

1. The importing firms and exporting firms will both expand since the trade brings lower costs, thus they create more job opportunities.

The author quoted several findings and figures from studies to prove that firms in both developed and developing countries enjoy lower input costs and higher sales through international trading.

1. Besides exporters, importers also pay higher wages.

Amiti and Davis (2012) find that exporters pay wages that are higher by 8 per cent, importers pay wages that are higher by 15 per cent, and firms that both import and export pay wages up to 25 per cent higher than firms that are not engaged in international trade.

1. The overall effects on employment and wages is positive, though it may differ with countries.

While a lot of literature have suggested that imports caused severe negative substitution effect on labor markets, other studies that take general equilibrium channels into account have pointed out that imports actually encourage the development of firms that were exposed to import competition. However, the effect is uneven between regions.

1. Within a country, the benefits of trade are not distributed evenly.

Importers enjoys less benefit than exporters in wages and employment when the trade shock hit. In addition, the less educated workers may even face negative impact such as unemployment and lower wages.

1. Trade balances, the pattern of trade opening, and the degree of regional diversification are the 3 most important factors of how easily a country can adjust to trade.

Firstly, if there is a trade deficit, the non-tradable sector will expand, and the tradable sector will suffer from a loss in human capital. Secondly, U.S has a comparative advantage in textiles than Germany, so U.S did not lose parts in this sector as Germany did when China exported textiles in 1995.  Finally, Yi et al. (2017) found that earning disparities in less diversified regions of Germany were three times as high as in highly diversified regions.

1. Trade affect the structure of employment by increasing the demand for high skills, shifting employment towards services in advanced economies, and improving women’s employment status.

Countries such as Indonesia and Mexico found that importing firms would like to employ more skilled workers. Meanwhile, United States and several European countries have experienced fast shift towards services-based economies. Referring to women’s employment status, more women are involved in the labor market, and the wage difference between men and women has been shrinking.

Evaluation of the report

Strengths:

1. Comparison is one of the mostly used measures in this paper, which provides a thorough and objective view of the main issue. For example, while labor-intensive workers in developing countries enjoy higher wages and more job opportunities from trade, those in developed countries may face unemployment. Thus, the paper suggested that trade’s effect on labor market cannot be analyzed by a region or a single group of workers, but should be viewed as a whole.
2.  Since there are often exceptions of the argument, the paper wisely suggests that we should not only focus on the overall effect of trade on labor market, but rather analyze it by regions, by sectors, by different types of workers, and by gender.
3. Indirect effect of trade

One of the highlighters of this paper is the author’s argument in 3(a): taking indirect effects of trade into account is a more comprehensive way to analyze trade’s overall effects. The substitution effect of import competition on employment is one of the most focused problem when discussing whether to encourage trade or not, but the indirect effect on lower input costs and disposable income should not be left aside. While Trump holding a negative attitude towards free trade in the cause of job loss, this argument has refuted his opinion solidly.

1. Women’s employment status

The gender equality effect, which is often neglected by people when talking about trade’s effect, is illustrated by author in details. The argument, that trade improves women’s likelihood to work and their wage level provides readers a fresh idea on trade’s effect on labor markets. Thus, the readers, especially the women ones are more likely to generate a more positive attitude towards international trade.

Weaknesses:

1. Within each argument, the author firstly illustrated his own point of view, then provided evidence, and illustrated the underlying principle of this phenomenon. While the majority of the evidence are data and findings from other literature and studies, he did not present his own simulation, which has undermined the authority of the evidence, thus the conclusion.
2. Overlapped arguments

In section 4, the author attempted to discuss how would trade change the structure of employment. However, one of the sub-sector: “Trade also benefits unskilled workers and the poor” does not correlate very well with the sub-topic. Besides, the trade’s effect on lower skilled workers has been discussed in section 3.