Topics in the Globalisation Debate 2: Labour Markets

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Topics 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?
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Globalisation 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.
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Rodrik 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.
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Elasticity 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
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Changes 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.
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Change in the U.S. Real Wages(per percentile
between 1970 and 2002 )
Source Smith (2006)
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Outsourcing

• 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

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Globalisation 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?

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Impact 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.
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Imposing 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
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Imposing 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
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Wages, 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
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The 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/
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Impact 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
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Impact 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)
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Impact 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)
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Impact 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)
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Impact 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)
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Summary 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)
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PROGRESA (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
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Suggested 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