Lecture 4: MNE and Wages

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Lecture 4 MNE and Wages

• Developed and Developing Economies

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High Education Unemployment Rate
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Anti-Globalization Movement

• Low wages (and bad working conditions) of workers
  in developing countries export industries ? Not
  helpful for workers
• Is the critique reasonable?
• Not in the economic sense
• Ricardian model comparative advantages
• Why do developing countries have cost advantages?
• Labor standards, environmental policy

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Globalization (Developed vs.Developing Countries)

• Rise in export of manufacturing goods from
  developing countries (major shift)
• Low wages in developing countries
• Is this a problem?
• Ricardian model
• Relative demand for unskilled labor
• Heckscher-Ohlin model

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Ricardian model Low wages Is this a problem?

• YL/a
• MPLw/p
• 1/a

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I. Ricardian model Low wages Is this a problem?

• Free trade ? specialization aH/aH gt w/w gt
  aL/aL
• 8 gt w/w gt 2, e.g. w 4w
• i. aHw w PH
• w/PH 1 and w/PH1/4
• ii. aL w 2w PL
• Þ w/PL 1/2 and w/PL2

No problem !
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II. The Factor abundance model

• Heckscher-Ohlin model expanding on the
  comparative advantage (Ricardian) model by
  allowing for multiple factors of production.
• Factors of production (not manufactured, used in
  a variety of industries, and not internationally
  mobile)
• Skilled/unskilled labor
• capital
• specific resources (such as gold deposits,
  forests, fisheries, oil, etc.)

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II. The Factor abundance model

• Comparative advantage arises from differences in
  national factor endowments.
• Prediction countries should export goods that
  intensively use factors that they possess in
  relative abundance.

World Totals
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Impact of Globalization on Developed countries

• Prediction of Heckscher-Ohlin Model Labor are
  hurt in the labor scarce country, high-wage
  country, i.e. developed countries
• i. Shift in relative labor demand for unskilled
  labor due to abundance of low-skilled labor in
  developing countries
• ii. Increasing demand elasticity

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Impact of Globalization on Developed countries

• Shift in relative labor demand for unskilled
• When it falls, the relative demand curve for
  unskilled labor shifts in leading to lower
  relative wages and employment.

wL/wH
Ls
LD
LD
NL/NH
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Impact of Globalization on Developed countries

• ii. Increasing demand elasticity of labor,
  especially unskilled labor
• When the world economy integrates it becomes
  easier to substitute domestic unskilled labor for
  foreign unskilled labor.

wL
Ls
LD(open)
LD (closed)
NL
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Impact of Globalization on Developed countries
wL

• ii. Increasing demand elasticity of labor
• Higher volatility in wages and employment
• Bargaining power of unskilled labor erodes

Ls
LD(open)
LD (closed)
NL
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Relative Wage Rate for SkilledLabor
Evolution of the Skill Premium (Skilled Labor
Requires College Completion)
Source Krusell, Ohanian, Rios-Rull and Violante
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Feenstra and Hanson (1996)

• Outsourcing import of intermediate inputs by
  domestic firms
• Fragmentation of production process
• Import competition from low-wage countries
  implies moving of unskilled intensive activities
  abroad
• ? skills upgrading within industries

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Feenstra and Hanson (1996)

• Import competition ? outsourcing
• SO import of intermediate inputs (share)
• SM import of final goods (share)
• large positive corr(DSO, DSM ) supports
  hypothesis corr(DSO, DSM ) 0.70
• outsourcing ? skills-upgrading within industries
• wage share of skilled labor in industry j
  sNj(wHEH/Si(wiEi))j measured by non-production
  workers,
• DsNj measure of skills-upgrading
• DsNj .. b DSOj..

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Feenstra and Hanson (1996)

• Outsourcing ? skills-upgrading within industries
• b is found to be positive and significant for
  1979-90
• Importance
• b 0.384
• DsN 0.389
• DSO 0.313
• Percentage explained by outsourcing
• b DSO/DsN31