Über die Autorin bzw. den Autor

Carl Davidson is professor of economics and chair of the Department of Economics at Michigan State University. Steven J. Matusz is professor of economics at Michigan State. They are the authors of "International Trade and Labor Markets: Theory, Evidence, and Policy Implications".

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"The pathbreaking research synthesized in this volume shows that labor market frictions are central to understanding the distributional consequences of international trade. Anyone interested in the intellectual debate about globalization should read this book. It is an essential reference for researchers and students in international trade."--Stephen J. Redding, London School of Economics and Political Science

"Davidson and Matusz pioneered the modern theory of international trade with labor market frictions. This book knits together their major work on this subject, and delivers fundamental insights concerning the effects of globalization on unemployment patterns, wage distributions, adjustment burdens, intergenerational welfare gaps, and trade policy formation. Any serious study of this literature should begin with this volume."--James R. Tybout, Pennsylvania State University

"This is an important and timely volume. The quality of scholarship in these papers is of a consistently high standard, and readers will not only find the individual papers analytically rich but also accessible. The economics profession has finally recognized just what a central issue trade with unemployment is--Davidson and Matusz recognized it twenty years ago and have been building tractable models that have yielded important insights."--David Greenaway, University of Nottingham

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INTERNATIONAL TRADE WITH EQUILIBRIUM UNEMPLOYMENT

PRINCETON UNIVERSITY PRESS

Contents

Preface.................................................................................................................................ixAcknowledgments.........................................................................................................................xvCHAPTER 1 Our Motivation...............................................................................................................1PART 1: NEW INSIGHTS FROM "OLD" TRADE THEORY............................................................................................25Introduction to Part 1..................................................................................................................27CHAPTER 2 The Structure of Simple General Equilibrium Models with Frictional Unemployment..............................................33CHAPTER 3 Trade and Search-Generated Unemployment......................................................................................60PART 2: COMPLICATIONS...................................................................................................................91Introduction to Part 2..................................................................................................................93CHAPTER 4 Multiple Free Trade Equilibria in Micro Models of Unemployment...............................................................97CHAPTER 5 Jobs and Chocolate: Samuelsonian Surpluses in Dynamic Models of Unemployment.................................................110CHAPTER 6 Long-Run Lunacy, Short-Run Sanity: A Simple Model of Trade with Labor Market Turnover........................................138PART 3: EMPIRICS........................................................................................................................159Introduction to Part 3..................................................................................................................161CHAPTER 7 Trade and Turnover: Theory and Evidence......................................................................................165CHAPTER 8 Trade, Turnover, and Tithing.................................................................................................195PART 4: ADJUSTMENT COSTS AND POLICY ISSUES..............................................................................................221Introduction to Part 4..................................................................................................................223CHAPTER 9 Should Policy Makers Be Concerned about Adjustment Costs?....................................................................227CHAPTER 10 An Overlapping-Generations Model of Escape Clause Protection................................................................265CHAPTER 11 Trade Liberalization and Compensation.......................................................................................292CHAPTER 12 Can Compensation Save Free Trade?...........................................................................................321PART 5: NEW INSIGHTS FROM "NEW" TRADE THEORY............................................................................................349Introduction to Part 5..................................................................................................................351CHAPTER 13 Globalization and Firm-Level Adjustment with Imperfect Labor Markets........................................................355CHAPTER 14 Outsourcing Peter to Pay Paul: High-Skill Expectations and Low-Skill Wages with Imperfect Labor Markets.....................388INDEX...................................................................................................................................407

Chapter One

In 1992 H. Ross Perot ran as an independent candidate for the presidency of the United States. Two of his major campaign issues were the size of the national debt and a promise to block the passage of the North America Free Trade Agreement (NAFTA) in response to fears that this would lead to large job losses for American workers. Perhaps the most well-known phrase from this campaign was tied to his prediction that the passage of NAFTA would result in a "giant sucking sound" as jobs headed south for Mexico where wages were significantly below those paid in the United States. Playing off of such fears, Perot garnered roughly 19% of the popular vote, making him the second most successful third-party presidential candidate over the past hundred years.

Perot is not the only politician to argue that there is a strong link between international trade and jobs. In fact, we would argue that this is the norm. Almost every public debate about trade policy seems to focus on how job creation and job destruction will be affected. The two sides always seem to agree on what the central issue is—trade and jobs—they just disagree about the likely impact of openness on employment. Those who favor freer trade argue that one of its primary benefits is that openness expands our export markets and therefore creates new jobs. In contrast, those that favor trade restrictions worry that liberalization allows countries to shift production to lower wage countries, thereby destroying domestic jobs.

Most academic economists specializing in international economics view both of these arguments as fundamentally flawed. The standard view seems to be that overall employment is largely independent of trade policy and that the primary impact of trade on workers comes through the changes in their wages. Given this firm belief that trade does not affect aggregate employment, the profession has tended to rely almost exclusively on full-employment models to investigate the link between trade and worker welfare.

Since the early 1980s, we have argued that this reliance on full-employment modeling, by its very nature, misses the point and that it is time to extend conventional trade models to take into account the market imperfections that lead to equilibrium unemployment. We have made this argument in many articles, but each one taken separately addressed only a small subset of issues. In this book, we bring much of our work together. We believe that the value of this exercise is in highlighting a coherent research agenda that has yielded many new insights and strengthens the case that there awaits much fruitful and important research. In particular, we hope to convince our readers that the modeling techniques required to add unemployment to standard trade models are now available and that significant new insights can be gained from such an extension. Moreover, we emphasize that the development of such models allows for the consideration of important issues that simply cannot be addressed in a full-employment framework.

Our goal in this introductory chapter is to make the case that models built around full employment, while clearly useful in understanding many of the most subtle issues involving international trade, are ill equipped to seriously tackle a variety of critically important trade-related issues, for which a deep understanding demands more textured modeling of the labor market. Whereas many reasons led us to believe this to be the case, we concentrate here on the three that we consider to be most compelling. These three reasons are tied to recent developments in labor economics and macroeconomics as well as the apparent disconnect between the public and academic views of the impact of trade on labor market outcomes. Once we have made our case, we then go on to briefly summarize the contents of the book and provide a rationale for its organization.

Reason 1: A lack of adequate research on trade with unemployment leaves a vacuum to be filled by protectionist pressure.

It is easy to make the case that many noneconomists, including those in position to craft policy, seem absolutely convinced that international trade is all about the jobs that it creates and/or destroys. We began this chapter by pointing to H. Ross Perot's well-know prediction about the "giant sucking sound" that would occur as American jobs moved to Mexico following the passage of NAFTA. Perot was not in favor of trade liberalization with Mexico and made his prediction in an effort to block NAFTA's passage. Of course, we could have just as easily focused on the statement made by George H. W. Bush when on a 1992 trade-promoting visit to Japan he declared that his trip was all about generating "jobs, jobs, jobs." A few other choice quotes from the NAFTA debate help to underscore the prevalence of this view. Note that in each case, the main focus is on the link between trade and jobs:

Unfair trade agreements, passed by both Republicans and Democrats, have sent millions of jobs to other countries. We need to stop this hemorrhaging and find ways for American workers to compete in the new market. Russ Feingold (U.S. Senator–Wisconsin, February 2005) The Bush Administration and the Congress have to stop ignoring this crisis in international trade. The longer we ignore it, the more American jobs will move overseas. It's just that simple. Byron Dorgan (U.S. Senator–North Dakota, March 2005) There is $1.4 billion a day in trade that goes back and forth across the border. That means millions of jobs and livelihoods for families here in Canada and for families in the United States. Paul Cellucci (U.S. Ambassador to Canada, March 2005)

Some have even suggested that NAFTA resulted in an outcome that harmed workers on both sides of the border, with Mexican workers losing jobs and suffering wages loses along with their American counterparts:

Since NAFTA was put in place, Mexico has lost 1.9 million jobs and most Mexicans' real wages have fallen. Stephen Lynch (U.S. Congressman–Massachusetts, May 2005)

And this view of trade is not an American phenomenon; it is true in virtually every part of the world:

The global economy is a fact. The expansion of world trade—with exports up over 50 percent since 1990—has created millions of new jobs and offered many the chance to move from poverty towards prosperity.... [A]bove all ... more open markets and more trade means growth and new jobs. Tony Blair (Statement to the WTO, 1998)

[Free trade is] the key to jobs for our people, prosperity and actually to development in the poorest parts of the world. Tony Blair (Statement to Canadian Parliament, 2001)

Finally, we note the seemingly far-fetched suggestion that the link among trade, jobs, and economic growth is so strong that liberalizing trade is an ideal way to fight terrorism:

Trade creates jobs and lifts people out of poverty. And when that happens, societies stabilize and grow. And there is nothing like a stable society to fight terrorism and strengthen democracy, freedom and rule of law. Dennis Hastert (Speaker of the House, July 2005)

Of course, we could easily fill all the pages of this book with more quotes that would support this contention, but we do not think we have to—we would be surprised if anyone disagrees with us.

Given the chorus of public opinion and statements by politicians of all stripes regarding the links between employment and trade, it might be natural for the academic community to provide guidance to those who wish to become informed and sort out the arguments. After all, better policies are likely to result if they are based on scientific principles rather than a politician's gut instincts. In fact, we heartily agree with the sentiments of the former U.S. Senate Majority Leader Bill Frist, who argued that "sound science must be a basis to governing our trade relations around the globe." So, if we turn to academia, what do we find? We believe that the following two quotes, which we have used repeatedly to motivate interest in our previous work, capture the mainstream view among economists specializing in international economics:

It should be possible to emphasize to students that the level of employment is a macroeconomic issue ... depending in the long run on the natural rate of unemployment, with microeconomic policies like tariffs having little net effect. Paul Krugman (American Economic Review, 1993)

Economists understand that the effect of protectionist policies is not on the overall employment of domestic resources, but rather on the allocation of resources across productive activities. Michael Mussa (American Economic Review, 1993)

The point that Krugman and Mussa are making is a simple one that is generally accepted by macroeconomists: the level of aggregate economic activity is dictated solely by macroeconomic variables such as the money supply. While we understand and respect this view, we also feel that it is a mistake to dismiss the public's concerns about trade and jobs so casually. We have several reasons for this. To begin with, very little direct empirical evidence supports the view that aggregate unemployment is independent of trade policy. Although it is true that a large number of studies have examined the impact of trade on jobs, virtually all of these focus on a specific industry or a set of industries (e.g., manufacturing in the United States), and almost none look at aggregate employment (see chapter 2 of Davidson and Matusz 2004 for a detailed review of the evidence).

Moreover, we would argue that there are good reasons to suspect that trade policy must affect the natural rate of unemployment in most economies. This follows from the observation that labor market frictions clearly exist and seem to vary across geographic regions within countries and sectors across economies. Differential frictions suggest different "natural rates" of unemployment that are both region specific and sector specific. By construction, the economywide natural rate of unemployment is a convex combination of these component parts. By reallocating resources across regions and sectors, more liberal trade necessarily changes the weighting scheme and must therefore affect the economywide natural rate of unemployment. For example, the economywide natural rate of unemployment would increase if more liberal trade induced a shift of resources from sectors with relatively low natural rates of unemployment to those with relatively high natural rates.

This point has been made in a number of articles including Davidson, Martin, and Matusz (1987, 1999), Matusz (1985, 1994), and, more recently, Helpman and Itskhoki (2007) and Helpman, Itskhoki, and Redding (2008). In addition, Janiak (2006) recently embedded equilibrium unemployment in a Melitz (2003) model of monopolistic competition and firm heterogeneity and demonstrated that higher trade exposure results in lower aggregate employment. This result is supported by Janiak's subsequent empirical work showing that a one-point increase in the import penetration ratio results in a 14.7-point increase in the job destruction rate without any significant increase in the rate of job creation. Additional empirical work on the link between trade and unemployment can be found in Dutt, Mitra, and Ranjan (2008).

While the overall impact of trade on unemployment is an empirical question, our expectation is that it is likely to be quite small. And this issue has never been the focus of our research (which is why this book is not titled Trade and Unemployment). This leads to a natural question: If our conjecture is correct and trade has only a small effect on aggregate unemployment, what is the cost of simply using full-employment models to investigate trade issues? Our answer consists of two parts; one is tied to the manner in which our views are perceived by the public and the other deals directly with a substantive research issue.

It is one thing for scientists to dismiss as irrelevant those who believe the Earth is flat. Virtually everyone can tell the difference between fact and fiction with respect to the shape of our planet. In contrast, issues as fundamental to economists as comparative advantage are not as firmly established among the wider public. By assuming away the connection between trade and unemployment, which many people believe to be both real and important, we make it all too easy for those who push for protectionist measures in the popular press to simply dismiss anything that economists have to say about trade. As an example, consider the following passage from an April 2006 article in the Monthly Review by Martin Hart-Landsberg titled "Neoliberalism: Myths and Reality":

Like all theories, the theory of comparative advantage (and its conclusion) is based on a number of assumptions. Among the most important are: • There is perfect competition between firms.

• There is full employment of all factors of production.

• Labor and capital are perfectly mobile within a country and do not move across national borders.

• A country's gains from trade are captured by those living in the country and spent locally.

• A country's external trade is always in balance.

• Market prices accurately reflect the real (or social) costs of the products produced.

Even a quick consideration of these assumptions reveals that they are extensive and unrealistic. Moreover, if they are not satisfied, there is no basis for accepting the theory's conclusion that free-market policies will promote international well being. For example, the assumption of full employment of all factors of production, including labor, is obviously false. Equally problematic is the theory's implied restructuring process, which assumes that (but never explains how) workers who lose their jobs as a result of free-trade generated imports will quickly find new employment in the expanding export sector of the economy. In reality, workers (and other factors of production) may not be equally productive in alternative uses. Even if we ignore this problem, if their reallocation is not sufficiently fast, the newly liberalized economy will likely suffer an increase in unemployment, leading to a reduction in aggregate demand and perhaps recession. Thus, even if all factors of production eventually become fully employed, it is quite possible that the cost of adjustment would outweigh the alleged efficiency gains from the trade-induced restructuring.

The author's message in this passage is clear: because academics use full-employment models, our results have no credibility. Although we do not agree with this conclusion, we must admit that we are sympathetic to some of the points that are made along the way. For example, while the profession acknowledges the existence of trade-related adjustment costs, little effort has been directed at quantifying them at an aggregate level. In addition, whereas the profession acknowledges that trade harms some agents, we have not spent a great deal of energy trying to figure out the best way to redistribute the gains from trade in order to compensate those who lose (so that a true Pareto improvement can be achieved). There has been some work on these topics, but not nearly as much as one would expect given the prominence these issues command in public discourse. It is not hard to figure out why: these issues cannot be examined in full-employment models, which are the bread and butter of our field.

We want to make it clear that we are not questioning the value of abstraction. Models will always be filled with unrealistic assumptions and the profession will always be vulnerable to criticism like the one provided above. But when it comes to trade issues, assuming away unemployment is, in our minds, especially problematic given the recent evidence that the personal cost of worker dislocation may be quite high. For example, Jacobson, LaLonde, and Sullivan (1993a, b) find that the average dislocated worker suffers a loss in lifetime earnings of $80,000, with much of the loss attributed to a lower reemployment wage. And, more recently, Kletzer (2001) reported that the average dislocated worker in her study took a 13% pay cut on his or her new job. These are the kinds of personal costs that often accompany changes in trade policy that appear to be of paramount importance to many in the public domain. And even if the aggregate gains from trade swamp such personal losses, the profession appears heartless and disconnected from the concerns of common citizens when it ignores them. This has led several prominent economists such as Alan Blinder and Dani Rodrik to call on economists to think more deeply about our attitude toward trade policy. One of the major points that we hope to make in this book is that there is no need to continue to rely on full-employment models—the tools are now available to build and analyze general equilibrium models that allow for equilibrium unemployment. Doing so and using these models to analyze standard trade issues will make it far more difficult for our critics to ignore our claims.

(Continues...)

Excerpted from INTERNATIONAL TRADE WITH EQUILIBRIUM UNEMPLOYMENTby CARL DAVIDSON STEVEN J. MATUSZ Copyright © 2010 by Princeton University Press. Excerpted by permission of PRINCETON UNIVERSITY PRESS. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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