Trade, Jobs and Wages

Trade, Jobs and Wages

Hian Teck Hoon

The world’s increasing integration through trade and the persistence of high unemployment in Europe, and other areas of the world, highlight the need to understand the implications of free trade for unemployment. Trade, Jobs and Wages analyses how employment levels and real wages are affected by international trade. Popular trade theory disregards the impact of free trade on the rate of unemployment, since it assumes full employment at the outset. By focusing on the determinants of the natural rate of unemployment, Professor Hoon places an emphasis on real, as opposed to monetary, factors in accounting for long term trends in wages and unemployment.

Chapter 7: Trade, High-wage Jobs and the Wage Gap

Hian Teck Hoon

Subjects: business and management, international business, economics and finance, international economics, labour economics

Extract

INTRODUCTION 7.1 After the collapse of world trade during the interwar years, the two decades that followed have been characterised by growing international integration. This is especially true for the Western European economies. Ben-David (1993), in particular, has argued that income convergence there has been facilitated by the high degree of trade integration among the industrialised countries. One aspect of the trade pattern among these economies that has been highlighted is the dominance of intra-industry trade. For example, Krugman (1995, p. 340) cites the following figures for the trade of European Union countries: Taken individually, the average trade share is 28.0 per cent in 1990. However, more than 60 per cent of their merchandise trade is with each other. If the European Union is taken as a unit, its merchandise trade with the external world is only 9 per cent of GDP. (Katz and Summers (1989) have also stressed the importance of intra-industry trade in the US trade flows.) Following the work of Doeringer and Piore (1971), there is also a large empirical literature that documents the presence of inter-industry wage differentials that are stable over time and across space. In particular, apparently identical workers earn higher wages in the primary sector than in the secondary sector, making a distinction between good and bad jobs analytically meaningful. Kenneth Judd, in the general discussion of Katz and Summers (1989) published in the Brookings papers, has noted that the primary sector is monopolistically competitive, being characterised by high price–cost ratios...

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