INTERNATIONAL TRADE AND LABOUR MARKETS International Trade and Labour Markets Edited by Jitendralal Borkakoti Middlesex University and Chris Milner CREDIT University ofN ottingham for the International Economics Study Group First published in Great Britain 1997 by MACMILLAN PRESS LTD Houndmills. Basingstoke. Hampshire RG21 6XS and London Companies and representatives throughout the world A catalogue record for this book is available from the British Library. ISBN 978-1-349-14579-9 ISBN 978-1-349-14577-5 (eBook) DOI 10.1007/978-1-349-14577-5 First published in the United States of America 1997 by ST. MARTIN'S PRESS, INC., Scholarly and Reference Division. 175 Fifth Avenue. New York. N.Y. 10010 ISBN 978-0-312-17733-1 Library of Congress Cataloging-in-Publication Data International trade and labour markets 1 edited by Jitendralal Borkakoti and Chris Milner. p. cm. Contains papers originally presented at the 20th Annual Conference of the International Economics Study Group. held at the University of Sussex. September. 22-24. 1995. Includes bibliogra:>hical references and index. ISBN 978-0-312-17733-1 (cloth: alk. paper) I. Foreign trade and employment-Congresses. 2. Labor market -Congresses. I. Borkakoti. Jitendralal. II. Milner. Chris. III. International Economics Study Group. Conference (20th: 1995 : University of Sussex) H05710.7.157 1997 331.12-DC21 97-22991 CIP © International Economics Study Group 1997 Softcover reprint ofthe hardcover 1st edition 1997 AlJ rights reserved. No reproduction. copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced. copied or transmitted save with written permission or in accordance with the provisions of the Copyright. Designs and Patents Act 1988. or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency. 90 Tottenham Court Road. London WI P 9HE. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright. Designs and Patents Act 1988. This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. 1098765 4 3 2 1 06 05 04 03 02 01 00 99 98 97 Contents International Economics Study Group vi Notes on Contributors Vll Preface viii International trade. employment and unemployment litendralal Borkakoti and Chris Milner 2 Trade liberalization and unemployment: Policy issues and evidence from Chile 8 Alejandra Cox Edwards and Sebastian Edwards 3 Lessons for policy reform in light of the Mexican experience 44 Anne O. Krueger 4 International trade. deindustrialization and labour demand: An input-output study for the UK (1979-90) 62 Mary Gregory and Christine Greenhalgh 5 The impact of import penetration on unemployment in UK manufacturing 90 litendralal Borkakoti 6 Trade and manufacturing employment in the United Kingdom 118 Robert C. Hine and Peter Wright 7 How trade hurt unskilled workers 140 Adrian Wood 8 Occupational employment and wage changes in the UK: Trade and technology effects 169 Anthony Courakis. Keith E. Maskus and Allan Webster 9 Optimum inflation. taxation and monetary arrangements in the open economy 203 Peter Sinclair 10 Tied aid. unemployment and welfare 219 Sajal Lahiri and Pascalis Raimondos-M¢ller v International Economics Study Group The International Economics Study Group (IESG) was formed in 1973 to provide a forum in which professional economists with an interest in international economics can discuss developments in their field. It is concerned with both the theoretical and applied aspects of this sub ject. The group has a regular seminar meeting series at the London School of Economics and runs a mini-conference and major annual conference each year. The IESG's primary funding is from the Economics and Social Re search Council but other organizations sometimes provide additional finance. IESG Management Committee Chairman Professor Chris Milner, University of Nottingham Secretary Dr Robert Read, University of Lancaster Members Dr. litendralal Borkakoti, Middlesex University Professor Alasdair Smith, University of Sussex Professor David Vines, University of Oxford Professor L. Alan Winters, World Bank and University of Birmingham Mr Henry Scott, University of Birmingham vi Notes on Contributors Jitendralal Borkakoti, Middlesex University Anthony Courakis, Brasenose College, Oxford Alejandra Cox Edwards, California State University and World Bank Sebastian Edwards, University of California and World Bank Christine Greenhalgh, St Peter's College, Oxford Mary Gregory, St Hilda's College, Oxford Robert C. Hine, University of Nottingham Anne O. Krueger, Stanford University Sajal Lahiri, University of Essex Keith E. Maskus, University of Colorado at Boulder Chris Milner, University of Nottingham Pascalis Raimondos-M0ller, Copenhagen Business School Peter Sinclair, University of Birmingham Allan Webster, Maxwell Stamp pIc Adrian Wood, University of Sussex Peter Wright, University of Nottingham vii Preface This volume contains the papers originally presented at the 20th Annual Conference of the International Economics Study Group, held at the Isle of Thorns Training Centre, University of Sussex, on 22-24 September 1995. The conference focused on the intricate rela tionship between international trade and labour markets. The papers are both theoretical and empirical, and the countries considered in clude the UK, Mexico and Chile. We wish to express our gratitude to the authors who accepted our invitation to present papers. We also wish to thank the discussants whose comments and suggestions were valuable. The list of discussants includes V. Balasubramanyam (Lancaster University), John Black (Uni versity of Exeter), Alec Chrystal (City University), John Martin (DECD), Henry Scott (University of Birmingham), Jeffrey Sheen (University of Sydney), Peter Sinclair (University of Birmingham), Alasdair Smith (University of Sussex), and Allan Webster (Maxwell Stamp pIc). Lastly, we thank all the participants who helped to make this conference a success. Jitendralal Borkakoti Principal Lecturer in Economics CRIE, Middlesex University and Chris Milner Professor of International Economics CREDIT, University of Nottingham 20 August 1996 viii 1 International Trade, Employment and Unemployment Jitendralal Borkakoti and Chris Milner INTRODUCTION During the past few decades. a variety of changes in the international economy have resulted in the increased integration of nations. both developed and developing. Globalization. or the increased openness of countries to the influences of the world economy. has accompanied or been associated with the increased mobility of factors. in particular capital. and with the growth of international trade and the increased importance of international competition in product markets. As a re sult the labour market in anyone country has become more intricately linked with those in other countries. Indeed with the emergence of high and persistent unemployment in many OECD countries and the growing wage dispersion between skilled and unskilled workers in some countries. there has been lively debate as to whether globalization is responsible for these labour market changes. There is some irony in the extent to which trade with developing countries. relatively well endowed with unskilled labour. is viewed as a cUlprit in this debate. since policy makers in many developing countries are also concerned with the labour market adjustments to the trade liberalization they have been encouraged to implement in order to expand their exports to the industrial countries! In this volume of papers which were originally commissioned for and presented at an IESG Annual Conference and which have subse quently been revised in the light of helpful comments from conference discussants and others. we concentrate on the trade and labour market aspects of globalization. We specifically revisit the issue of the rela tive importance of trade and technical progress in influencing employ ment and relative wages. Much of the debate so far has been hampered by the fact that the empirical work has tended to relate only to the 2 International Trade and Labour Markets United States. Here we make some attempt to redress this balance by including a number of UK-focused studies and by including also some non-OECD focus with two papers on Latin American experiences. By its nature, a conference volume is unlikely to provide comprehensive ness on a major theme such as trade, employment and unemployment, but the papers gathered here do demonstrate the large research agenda that is arising out of the increased theoretical and empirical interest in the trade-labour market linkages and from the collaborations between trade and labour market economists. THE ISSUES AND OUTLINE OF THE BOOK Besides confronting some of the core issues about the long run rela tionships between trade and employment or between trade and relative wages of skilled and unskiIled labour, and about the short run labour market adjustments to trade liberalization, the volume includes papers which tackle some specialist topics such as the effects of tied aid on donor country's employment and the optimal trade-off between infla tion and unemployment in an open economy. In some cases the links between the papers are strong and self-evident, in others the links are less obvious. Nonetheless the range of issues in these papers is im pressive and should make a contribution to the growing literature on the relationships between international trade and labour markets. Let us comment further on some of the main themes of the book. Reform and employment in Latin America Chapters 2 and 3 can be grouped together because they focus on one region of the world, namely Latin America, that has seen dramatic changes in trade strategy and performance in recent decades. Each of these two papers has a country-specific focus, on Chile and Mexico respectively, but they also have a wider relevance. Unilateral trade reforms have been initiated in many developing countries in the last two de cades. Given that Chile was one of the earliest of this phase of trade Iiberalizers and also one of the most extensive and rapid Iiberalizers, an analysis of the actual effects of these trade reforms on employment is particularly instructive. Similarly, Mexico was among the front runners in adopting policy reform programmes. It has been viewed as a particularly interesting case study because of the extent of the country's debt crisis, but is also an interesting example of the way that the 'new