First of all, how can trade lower down costs of production? As developing countries open up their markets, industrialized countries relocate their companies or its parts to new locations, because the benefit will include cheaper labour and a reduction or even absence of tariffs and tax exemptions offered by host countries. At the same time, it gives employment opportunities to host countries. A good example might be a move of the telecommunication industry to India: we get cheap phone calls, cheap internet, etc. , while Indians get their jobs. May look like two targets with one shot.
However, here the question comes how does it affect labour in developed countries? There are two main issues to be considered: first, what happened to the jobs in case of companies moving outside the country and, second, do cheap imports (may be from the same company that lowered its cost of production and thus, reduced its prices for consumers) cost jobs? Let’s look at the problem from the theoretical side and assume that industrialised countries produce two types of products: financial services (human capital intensive) and basic manufacturing (low-skilled labour intensive).
“Opening up for trade with the developing countries increases the supply of low-skilled labour intensive goods”13. This means, in order to compete (have an absolute advantage) industrialized countries must keep their costs of production low by cutting down wages or increasing productivity. But increased productivity leads to higher wages. This is confirmed by Figure1 below. The figure shows a strong tendency for the average wage to be higher in countries with higher average labour productivity (relative to the United States).
Figure 1 Average Labour Productivity and Average Wage in Manufacturing, 1995 14 !Debate! Global Policy Forum (GPF) claims absolutely contradictory statistics for the US: “In 1998, weekly wages were 12 percent lower than in 1973 on an inflation-adjusted basis. Productivity rose 33 percent over that period. Had pay kept pace with productivity, the average hourly wage would now be $18. 10, rather than $12. 77. That translates into a difference in annual pay of $11,000 for a full-time, year-round worker. “15
Thus, there are two ways: either protect domestic jobs by imposing different tariffs, quotas ; barriers on imported goods or simply allow cheap imports. In first case, is it worth to raise up tariffs ; non-tariff barriers? How much does it cost to protect a job? For example, it was estimated that it costs US consumers $60,000+ to buy US made clothing for each job “saved” by protectionism. However, the total gain in wages and profits is far less than $60,000. Krugman estimated that US consumers spent an additional $110,000 for each job saved in the auto industry.
16 According to Patrick A. Messerlin’s (professor of economics at the Institut d’ Etudes Politiques de Paris, 2001) examination, he estimated similar effects for 22 highly protected industries in the EU for 1990 (Figure2 below). He found that, the EU “consumers pay an average of about $191,000 per job maintained. Per year, this is over 6 times the average compensation for manufacturing worker in each country”. 17 Figure 2 Costs of jobs saved by protectionism in the EU for 1990. 18
Relaying on the data above, we can say that protectionism is expensive. While the Globalisation and Outsourcing Conference in New York, June 15, 2004, the first Deputy Managing Director of International Monetary Fund (IMF) Anne Krueger asserted that the important reason why protectionist pressure so often succeeds “is that it is easy to see where a job, or jobs, might be lost because of change, but virtually impossible to see where new jobs might have been created because of the new opportunities that technology or trade might bring”.
She also agreed that some jobs will be lost through trade, “just as some firms lose out because they are not sufficiently competitive. That this is so is not a new development, of course. Some skills inevitably become obsolete. That is where social safety nets come in, to help those affected get financial assistance, job retraining, and so on. Expensive job protection is not the answer”.
So from a choice of two, the cheapest, and probably, the best way for industrialized countries is just to liberalize trade20 and allow cheap imports and shift from “mass” labour to the generation of “elite” (knowledge, skilled) labour force (Comparative advantage, HO theory). Figures 3;4 21 present the empirical evidences of this shift: Figure3 shows a steady decline of proportion of manufacturing employment in selected countries between 1970 and 1996, while Figure4 illustrates a constant rise in service employment in that countries during the same period of time.
Figure 3 Figure 4 However, trade liberalisation may result in a permanent reduction in relative demand for low-skilled labour in the industrialized countries22; that in turn leads to a relative fall in low-skilled wages (Stolper-Samuelson Theorem23). The debate here is that on the other hand, it also might result in an increase in relative demand for skilled-labour, leading to a relative rise in skilled wages. So this is where an increasing wage inequality takes place.
For example, Business Week reports that in 1999 top executives earned 419 times the average wage of a blue-collar worker, up from 326:1 in 1998. In 1980, the ratio was 42:1 24 However, the importance of the above is that it may not let low-skilled unemployment to rise significantly even though it lowers down wages; and on the contrary, if wages are stable or rising, it will lead to an increased low-skilled unemployment, and this is what practically happened in Germany between 1970 and 1995 (see Figure5 below).
Figure 5 Relative Employment and Relative Wage of Low-skilled Employees in German Manufacturing Industries 1970-199525 Referring back to the question what happened to the jobs if companies re-locate partly or fully abroad, from the total employment level perspective, nearly all workers who lose their jobs will be re-employed sooner or later, even if sometimes for less paid jobs. As mentioned before, this may push them into thoughts about getting a higher education, go for training and qualify for a skilled job.
Relaying on the theory above and the position of labour in industrialized countries, let’s turn our attention to developing countries. As we have already seen that developed countries are turning towards producing human capital intensive goods and demand for low/unskilled labour has lowered there. Thus, according to the Stolper-Samuelson theorem, this will raise demand for low-skilled labour in developing countries and they will specialise in labour intensive goods (manufacturing goods), that in order will decrease unemployment and increase wages.
Does the theory prove in the real word? According to the Asia Regional Information Centre (ARIC) which provides an array of regularly updated information about the economic performance & prospects of 16 Asian nations, there is no evidence to support the theory. Table 2 below illustrates unemployment rates from 1990 to 2003 in some of the nations. The general trend of rising unemployment is clearly visible.