Topics in the Globalisation Debate 2: Labour Markets - PowerPoint PPT Presentation

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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? – PowerPoint PPT presentation

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Title: Topics in the Globalisation Debate 2: Labour Markets


1
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?
2
(No Transcript)
3
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.
4
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.
5
Elasticity of Labour Demand and Imposing Labour
Standards
  • Assume that higher labour standards are imposed
    (creates a new cost) ? supply curve shifts upward
    ? wages decrease, employment decreases
  • 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
6
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.
7
Change in the U.S. Real Wages(per percentile
between 1970 and 2002 )
Source Smith (2006)
8
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

9
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?

10
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.
11
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
12
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
13
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
14
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/
15
Impact of FAIRTRADE Overproduction and Quotas
price
  • FAIRTRADE provides a minimum price pFTr, 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 FTr system (and rest
    to the regular world market)

S0
pFTr
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
16
Impact of FAIRTRADECompetitive producer
price / cost
  • A producer that would produce given the world
    price, now sells QFT to the FAIRTRADE markets at
    price pFTr 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

pFTr
Transfer to FT producer
MC
p0
QFT
Q
Quantity
Haaparanta (2007)
17
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)
18
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 FTr
    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)
19
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 FTr product and demand curve shifts
    from D0 to D2
  • However if FTr has increased total production,
    the price of regular product still decreases in
    comparison to no FTr

S0
S2
S1
p0
p2
p1
D0
D2
Quantity
Haaparanta (2007)
20
Summary of FAIRTRADE
  • FAIRTRADE creates a transfer from weak producers
    of the regular product to the FTr producers and
    consumers of the regular product
  • Even FTr producers may be hurt, since they
    typically sell only a fraction of their
    production to the FTr system
  • Further topics Allocation of quotas, FTr as a
    device for price discrimation in rich countries
    (see e.g. Harfords the Undercover Economist,
    32-35).
  • More efficient policy Direct conditional cash
    transfers such as PROGRESA

Haaparanta (2007)
21
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
22
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
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