Title: Topics in the Globalisation Debate 2: Labour Markets
1Topics in the Globalisation Debate 2 Labour
Markets
This lecture draws, among other sources,
from Rodrik (1997) Has globalisation Gone too
Far? Institute for International Economics. Wolf
(2004) Why globalisation Works? Yale University
Press Haaparanta (2007) Reilu kauppa, kysyntä,
tarjonta ja tasapaino Kuka kaiken maksaa?
2(No Transcript)
3Globalisation and Rich Countries Labour Markets
- See Lecture 4 for discussion in the context of
HO-model. - Rodrik (1997) Open economies are more responsive
to changes in prices, including wages - ? Costs of improved working conditions cannot be
shared with employers as easily as before (see
previous slide) - ? Increased volatility of wages and/or employment
- ? Decrease in labours bargaining power
- ? There are basis to argue that globalisation
will have an adverse impact on capital-abundant
countries low-skilled workers - However, since the aggregate gain from free trade
is larger than the aggregate loss, it is possible
to compensate the losers and achieve a Pareto
improvement. This might also explain the welfare
states of some small, open economies.
Dani Rodrik (1997) Has globalisation Gone too
Far? Available at Institute for International
Economics website.
4Rodrik Shift and Increased Elasticity of Labour
Demand
capital-abundant country
- Autarky ? Free trade and capital flows
- (1) Demand for labour shifts inward in
capital-abundant countries - and (2) the demand curve becomes more elastic
(change in wage rate creates now larger impact on
quantity of employment, i.e. production can be
moved abroad)
wage
SL
(1)
(2)
wA
pFT
DLFT
DLA
QLA
QLFT
employment
Dani Rodrik (1997) Has globalisation Gone too
Far? Available at Institute for International
Economics website.
5Elasticity of Labour Demand and Imposing Labour
Standards
- Assume that higher labour standards are imposed
(creates a new cost) ? supply curve shifts upward
? wages increase, employment decrease - The more elastic the demand the more employment
decreases, wages decrease and the larger share of
the cost is paid by employees
SL
wage
SL
E
W
DLFT
employment
E employers share of the cost W workers share
6Changes in Wage Structure
- Between 1979 and 1995 real wages of full-time
working high-school dropouts declined by 20 and
the real wage of college graduates increased by
3 (Katz Author, 1999). The major candidates
for explanation are - Skill-biased technological change
- Increase in international trade
- Most of literature trade has not played a
major role because - the amount of trade is too small
- prices of (final) goods have not changed
consistently - employment between industries has not changed
consistently
See Feenstra Hanson (2003), Katz Author
(Handbook of Labor Economics, 1999) for
discussion.
7Change in the U.S. Real Wages(per percentile
between 1970 and 2002 )
Source Smith (2006)
8Outsourcing
- Feenstra Hanson (2003)
- Previous research has misread the data by
comparing whole industries with each other - In fact, a large amount of trade is in
intermediate inputs (outsourcing), which occur
inside the industries - This can have a much larger effect on wages than
trade in final goods - FH outsourcing can account for half or more of
the observed skill upgrading - FH Existing literature has just begun to
scratch the surface
9Globalisation and Poor Countries Labour Markets
- Hopefully, there is presently no actual
concentration camps anywhere. Instead some
sort of labour camps seem to have become an
essential part of our time - Ville Päivänsalo (referring to working
conditions in the developing world) in Helsingin
Sanomat, opinion pages, 31 October 2004 - Chinas rapid growth over the past two decades
has delivered more people from desperate poverty,
more quickly, than ever before. This does not
suggest exploitation. Moreover those who have
fled rural China to work in factories were
not forced to do so by anything other than their
poverty at home - Martin Wolf (2004, 185) in Why globalisation
Works?
10Impact of globalisation on Poor Countries Labour
Markets
- Globalisation critics
- developing world workers are not able to bargain
efficiently and are thus exploited ? rich
countries should impose universal minimum
standards (wages, working conditions etc.) - Mainstream economists
- trade and FDI increase the demand for labour (and
productivity) in the developing world ? labour
markets become tighter ? wages and working
conditions improve
One way to understand tighter is that there
are more opportunities employees can choose from.
In other words, their outside option increases,
which increases their bargaining power.
11Imposing Minimum Standards to the Developing
World (1)
- Assume a developing country with most of the
labour force employed in unproductive agriculture
- ? wages are set in agriculture (opportunity cost
of not working in modern sector) ? wages in
modern sector are less than labours marginal
product - ? (1) capital owners make very large profits
- ? (2) more labour flows to the modern sector
- ? less supply of labour in the agriculture ?
higher wages in agriculture ? higher wages in the
modern sector (i.e. the overall wages increase)
Martin Wolf (2004, 186) Why globalisation Works?
Yale University Press
12Imposing Minimum Standards to the Developing
World (2)
- Assume, now, that the labour in modern sector is
paid their marginal product - ? (1) capital owners make normal profits
- ? (2) no/less labour flows to the modern sector
- ? dual labour markets
- low incomes to the majority in agriculture
- high incomes for the few in modern sector
- Indian workers are so well protected from
exploitation by industrial bosses that they have
no jobs at all. The exact opposite happened in
South Korea and Taiwan
Martin Wolf (2004, 187) Why globalisation Works?
Yale University Press
13Wages, productivity and unit labour cost
Stephen Golub (1998) Does Trade with Low-Wage
Countries Hurt American Workers? Fed of
Philadelphia Business Review March/April 1998
14The FAIRTRADE Mark
- Certification system that demand traders to
- pay a price to producers that covers the costs of
sustainable production and living and a premium
that producers can invest in development - Minimum price system
- a guaranteed price that covers the cost of
production and ensures a living wage for growers - rises in line with market prices if they rise
above the minimum Fairtrade price
Source http//www.fairtrade.org.uk/
15Impact of FAIRTRADE Overproduction and Quotas
price
- FAIRTRADE provides a minimum price pFT, which is
above the world equilibrium price p0 - Given this price, supply is larger than demand
- To avoid this, quotas are allocated to producers
- e.g. Valkila (2007) surveys Nicaraguan FAIRTRADE
coffee farmers and finds that they sell only 30
of their production to the FT system (and rest to
the regular world market)
S0
pFT
p0
D
Quantity
Haaparanta (2007) Reilu kauppa, kysyntä,
tarjonta ja tasapaino Kuka kaiken
maksaa? Valkila (2007) Better of Bitter Coffee?
Implications of Fair Trade Coffee Certification
16Impact of FAIRTRADECompetitive producer
price / cost
- A producer that would produce given the world
price, now sells QFT to the FAIRTRADE markets at
price pFT and QQFT to the world market at price
p0 - From the producers point of view, identical
impact would be generated by giving him the
transfer in cash
pFT
Transfer to FT producer
MC
p0
QFT
Q
Quantity
Haaparanta (2007)
17Impact of FAIRTRADENon-competitive producer
price / cost
- Suppose production has fixed-cost rising
marginal cost leading to U-shaped average costs - Then the equilibrium price is p0 and producers
produce Q0 and small farms that would be able to
produce QSF will not enter the market - FAIRTRADE is aimed at small farms if the
transfer (previous slide) is larger than the loss
here, the amount of production will increase
AC
loss from QSF
p0
QSF
Q0
Quantity
Haaparanta (2007)
18Impact of FAIRTRADE Production increases, price
decreases
price
- For any given world price, there is now more
production ? price decreases - The weakest producers not participating in FT
will go bankrupt (prev. next slide) - Thus there is transfer from weak regular
producers to the FAIRTRADE producers AND
consumers of the regular product
S0
S1
p0
p1
D
Quantity
Haaparanta (2007)
19Impact of FAIRTRADE Regular production and
demand decrease
price
Regular Market
- Since some of the regular producers leave the
market, supply curve shifts from S1 to S2 - At the same time, consumers shift consumption
towards the FT product and demand curve shifts
from D0 to D2 - However if FT has increased total production, the
price of regular product still decreases in
comparison to no FT
S0
S2
S1
p0
p2
p1
D0
D2
Quantity
Haaparanta (2007)
20Summary of FAIRTRADE
- FAIRTRADE creates a transfer from weak producers
of the regular product to the FT producers and
consumers of the regular product - Even FT producers may be hurt, since they
typically sell only a fraction of their
production to the FT system - Allocation of quotas
- More efficient policy Direct conditional cash
transfers such as PROGRESA
Haaparanta (2007)
21PROGRESA (now called OPORTUNIDADES)
- Launched in August 1997 to improve education,
health and nutrition of poor families
(particularly children and their mothers) in
Mexico - Consists of cash transfers to poor households
conditional on child school attendance and visits
to health centers - Hard evidence on the effectiveness of the program
exists due to random assignment of the pilot
villages
http//www.ifpri.org/themes/progresa.htm
22Suggested Further Reading
- Martin Wolf (2004) Why Globalization Works? Yale
University Press - Joseph Stiglitz (2006) Making Globalization
Work. W.W. Norton - Paul Krugman (1996) Pop Internationalism. MIT
Press