Despite the major divide between neoclassical models and models incorporating frictions, or that between models with intersectoral allocation and intra-sectoral allocation, recent years have seen tremendous developments in how trade economists understand the dynamics of labor response to trade shocks. Upon examining the relationship between trade and inequality, this review discusses the new techniques that have been implemented for estimating structural models of labor market dynamics, and how these are crucial for analyzing welfare and distributional effects of trade. Global economic integration has shifted relatively low-skilled jobs from the rich world to labor-abundant low-wage countries, thus decreasing between-country inequality but increasing within-country inequality. Evidence so far shows that the distributional effects of globalization are centered mostly around job displacement, and stagnant and falling living standards in advanced economies, thus further increasing the gap between the rich and poor in industrialized countries. Besides, it appears that evidence mostly points to large costs of switching industries and occupations in response to a trade shock. Furthermore, with a shrinking manufacturing sector due to competitive pressures from abroad, trade-induced structural changes in the economy of industrialized countries most likely underlie not only the distributional effects of trade but also some hidden costs. As shown, these hidden costs concern increased mental and physical health risks, obesity and morbidity, lower fertility, greater job insecurity, decreased working conditions and impaired social functioning. Concerning the agricultural sector, to date there are only a few studies investigating the impact of trade shocks on labor market dynamics in developed countries, yet none focusing on EU countries. From this perspective, it is necessary to start to fill this research gap. In addition, given the persistency of the agricultural productivity gap also in developed countries, future analyses should better figure out to what extent these productivity gaps are the result of an effective resource misallocation, versus other potential explanations stressed by the recent literature, such as labor market frictions and selection or the high trade costs of agricultural and food products.
"Trade Liberalization and Labor Market Dynamics" in Better Agri-food Trade Modelling for Policy Analysis (BATModel) Deliverable D1.1: Broaden welfare implications of trade policy
Piriu, Andreea
;
2022
Abstract
Despite the major divide between neoclassical models and models incorporating frictions, or that between models with intersectoral allocation and intra-sectoral allocation, recent years have seen tremendous developments in how trade economists understand the dynamics of labor response to trade shocks. Upon examining the relationship between trade and inequality, this review discusses the new techniques that have been implemented for estimating structural models of labor market dynamics, and how these are crucial for analyzing welfare and distributional effects of trade. Global economic integration has shifted relatively low-skilled jobs from the rich world to labor-abundant low-wage countries, thus decreasing between-country inequality but increasing within-country inequality. Evidence so far shows that the distributional effects of globalization are centered mostly around job displacement, and stagnant and falling living standards in advanced economies, thus further increasing the gap between the rich and poor in industrialized countries. Besides, it appears that evidence mostly points to large costs of switching industries and occupations in response to a trade shock. Furthermore, with a shrinking manufacturing sector due to competitive pressures from abroad, trade-induced structural changes in the economy of industrialized countries most likely underlie not only the distributional effects of trade but also some hidden costs. As shown, these hidden costs concern increased mental and physical health risks, obesity and morbidity, lower fertility, greater job insecurity, decreased working conditions and impaired social functioning. Concerning the agricultural sector, to date there are only a few studies investigating the impact of trade shocks on labor market dynamics in developed countries, yet none focusing on EU countries. From this perspective, it is necessary to start to fill this research gap. In addition, given the persistency of the agricultural productivity gap also in developed countries, future analyses should better figure out to what extent these productivity gaps are the result of an effective resource misallocation, versus other potential explanations stressed by the recent literature, such as labor market frictions and selection or the high trade costs of agricultural and food products.
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