Trade

Does trade kill jobs or create them?

 

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Trade - separating fact from fiction

Does trade kill jobs or create them?

There is growing concern that international trade is a source of job losses and lower wages in OECD countries, with large emerging economies (such as China and India) reaping the benefit.

However, the evidence over the past decade, prior to the recent global recession, is that:

Open economies, not protected ones, achieve higher levels of economic growth. There has been a sharp rise in trade relative to GDP over the past decade, generally accompanied by increased prosperity and employment in countries that have liberalised. 

Video

Trade: good for jobs
OECD trade analyst Molly Lesher on how we benefit from open markets.

 
Trade openness has contributed to net job creation. Up to 2007 employment increased in all OECD countries except the Czech Republic, Japan and Poland, and the unemployment rate fell for OECD as a whole and for most of its members. The average unemployment rate in the OECD fell from 7.2% in 1995 to 5.6% in 2007 and, in the same period, trade in goods and services as a share of GDP rose from 19% to 28%.

Overall job stability has changed very little. Over this same period, the share of workers with less than one year of job tenure and average tenure, two commonly used indicators of labour turnover and job stability, did not change much.

In short, looking at the decade up to 2007, there is no evidence that trade openness led to overall job loss. And over the longer run, trade and investment liberalisation have raised average real wages in OECD countries. For example, a study of trade among 63 countries associated a rise of one percentage point in the ratio of trade to GDP (e.g. when the share of trade in GDP rises from 10% to 11%) with an increase in per-capita income of between 0.5 and 2%.

Workers, as consumers, also benefit substantially from open markets, through lower prices and wider choice of products and services.

 

The story behind the headlines...

 

Labour markets normally experience “churn”, with job creation and destruction occurring simultaneously. Changing patterns of international trade are only one of the many drivers of this continuous movement of workers from declining to expanding firms. While this raises legitimate labour adjustment concerns, the overall employment impacts tend to be limited.

 

For example, far more jobs have been created annually in the United States than have been lost to off-shoring in recent years. While it is sometimes regarded as controversial, outsourcing has also been associated with wage gains via its contribution to productivity enhancement. For example, in Germany outsourcing was associated with increased real wages for high-skilled workers by up to 3.3% between 1991 and 2000.

 

Even in the context of the economic crisis, trade liberalisation is not to blame for broad job losses. True, highly integrated international markets for goods and services may have acted as a channel for the propagation of the cyclical shock, but the global recession was the result of macro-economic imbalances and financial sector malfunctioning - not of open markets. And when the upswing comes, markets that stay open will help countries take full advantage of the renewed opportunities.

 

Once the current recession has ended, highly skilled labour, human and physical capital, all factors that are relatively abundant in the OECD area, will again be in high demand and can benefit from market opening. The consequent adjustment can yield gains across the economy, in some cases even in sectors where employment contracts. This is nowhere better illustrated than in the OECD textiles and clothing sector as producers have shifted activity towards market segments calling for more sophisticated technology, design and marketing. As a result, productivity has increased, and so have wages.

 

At the same time, however, income inequality within OECD economies has widened. Non-trade factors explain much of this, in particular technological change that has increased demand for skilled relative to unskilled workers. But trade also plays a role. Greater openness has led to increased specialisation of capital-rich OECD countries in capital-intensive activities and of labour-rich economies in labour-intensive activities. As a result, trade negatively affects that part of the OECD workforce vulnerable to increased imports from labour-abundant trading partners.

 

This does not mean that trade policy should be used to deal with income distribution issues. The answer rather is to allow the structural changes that follow from technological progress and international specialisation, which in turn contribute to higher incomes, while ensuring that the benefits are shared, including through effective education, labour market policies, taxation and social safety nets.

 

Labour market policies can help lower adjustment costs by creating an environment in which job creation is robust, training is readily available to upgrade skills, and mechanisms are in place to direct workers toward those jobs in which they will be most productive. Well-designed and targeted direct assistance programmes may also be needed to help trade-displaced workers. In practice, this may mean ensuring a better balance between income support for those who lose their jobs, adequate job-finding assistance, training, and proper re-employment incentives.

 

In conclusion

 

The globalisation process is on-going, driven by a combination of changes in technology, market reforms, and trade liberalisation. China and India, the biggest of the emerging economies, account for 38% of the world population, but only 6% of world output. China’s share of OECD countries’ aggregate exports and imports is still less than 10%. India is ranked only 11th among services exporters, with a global market share of 2.3%, compared with a US share, as the biggest services exporter, of 15%. The emergence of these economies is not a threat; it is as desirable as it is inevitable, and it is to be welcomed.

 

International economic integration will help to reduce global inequalities. Closing markets and “protecting” domestic sectors and workers will increase costs, contribute to declining demand, and stifle job creation and sustainable economic growth.

Open markets for trade and investment are pro-growth policies, offering substantial benefits to all economies – but they need to be accompanied by effective education, labour, adjustment, and social policies.

See also:

 Trade and the environment

 Trade and development

 Trade, innovation and growth

 Do open markets matter ... or is protectionism the answer?

 

 

 

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