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City down there, version 2 / Several seconds via Flickr

The pervasive and unfair costs of trade on workers

Íñigo Verduzco Gallo | 29 September 2014

International trade can contribute to the creation of more and better jobs but not always, not for everyone, and not everywhere. Thirty years after the beginning of a global push for liberalization we are finally starting to understand the real costs of trade liberalization, and who bears them - workers.

Most studies of the economic effects of international trade on workers have failed to consider one of its most important effects i.e. the erosion of job quality. However, recent studies have found that workers ultimately pay the bulk of the adjustment costs of trade liberalization (see for example Hollweg et al. 2014). These costs are burdensome and take a long time to dissipate, with employment levels and wages taking between 2 and 15 years (but typically 10 years) to reach their pre-liberalization levels. Worse still, developing countries face higher costs than developed countries. In developing countries, it is more likely that workers displaced by trade liberalization will turn to informal employment.

Alarmingly – and contrary to what traditional economic theory would suggest – lower-skilled workers in developing countries lose jobs at a faster rate than higher-skilled workers. Displaced workers shift to non-traded industries such as services or out of employment (at least formal employment). They are not absorbed by either industries with comparative advantage or exporters. (See Muendler (2010), who innovatively uses a panel dataset at the worker level with employer-employee data.) Instead, these firms shed more and hire fewer workers than the average firm.

These effects seem to be pervasive and are not exclusively borne by developing countries. Studies focusing on developed countries have also found that trade liberalization and offshoring have also had negative consequences for job quality, causing wages in non-industrial sectors to go down (see for example Ebenstein et al. 2009).

This is not to say that no workers have gained from trade liberalization. Few would label the Chinese experience in liberalization, which helped create a number of better-paying jobs for its citizens, as a failure. (Although the question of whether these better-paying jobs are also ‘better’ or ‘better quality’ jobs in the broader sense is debatable.)1 Additionally, it is undeniable that many skilled workers have certainly benefited. However, the winners are arguably few and far apart.

So what can countries do? While a comprehensive set of policy recommendations must take account of countries’ institutional structures, here are some important considerations.2

First, countries should follow a gradual approach to liberalization – much like the one followed by China. This would help spread reallocation costs over time and allow affected workers to adjust.

Second, a race for global market share through trade liberalizations and trade agreements should be conditional on parallel agreements on a minimum standard of job quality that is rigorously enforced internationally, like in the WTO agreements for example. This would avoid a ´race to the bottom´ in which workers around the globe compete against each other by accepting jobs of lower quality.

Finally, given the most recent findings in the literature, thorough consideration of the costs, benefits and compensation mechanisms is imperative for any policymaker contemplating trade liberalization.

The views and opinions expressed in this article are solely those of the author and do not reflect the views or opinions of the International Food Policy Research Institute.

Footnotes

1 McMillan, Margaret S. and Íñigo Verduzco (2011), ‘New Evidence on Trade and Employment: An Overview’, in Jansen, Marion, Ralf Peters and José Manuel Salazar-Xirinachs (eds.), Trade and Employment From Myths to Facts (pdf). Geneva: International Labour Organization. The authors document the astounding increase in China’s share of global industrial jobs. They show that while in 1980 more than a half of all (formal) industrial jobs were located in the developed world, by 2005 more than two-thirds of these jobs were located in developing countries; with China accounting for 65 percent of total industrial jobs in developing countries.

2  Hollweg et al. offer a list of sensible ideas when designing policies to compensate workers for adjustment costs. I encourage the reader to look at the full list.

Photo credit main picture: City down there, version 2 / Several seconds via Flickr

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Íñigo Verduzco Gallo

Íñigo Verduzco Gallo is Senior Research Analyst at the International Food Policy Research Institu...

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