Lecture 1: Trade and Labour

H. Vandenbussche

Research questions

Link between imports from low-wage countries and firm-level employment growth?

Link between imports from low-wage countries and firm-level skill-upgrading?

Theory: « Old »  Trade Theory

Explains why countries trade in DIFFERENT products

EU CHINA

MACHINES

TEXTILES

3. « Old » Trade Theory

L: Labour

K:Capital

EU

CHINA

Machines

Textiles

« New » Trade Theory

Explains why countries can trade in SAME products but with DIFFERENT factor intensities

EU CHINA

TEXILES

TEXTILES

« New » Trade theory

L:Labour

K: Capital

EU

CHINA

High quality Textiles

Low quality Textiles

Hypothesis

Based on endowment theory we expect firms’ employment growth to decrease with exposure to low wage import competition

Firm capital and skill intensity increase employment growth more in industries with low wage import competition

Bernard et al. for US plantsShare of Imports from Low wage (%)

Overall Import penetration (%) Employment change

1977 1992 1977 1992 1977-1997

Food 9 9 12 13 -3

Tobacco 6 15 6 3 -45

Textile 11 19 7 11 -38

Apparel 8 32 13 32 -40

Lumber 4 9 18 15 8

Furniture 1 5 3 11 6

Paper 0 0 29 24 1

Printing 0 3 3 4 42

Chemicals 1 2 17 17 3

Petroleum 0 3 10 9 -28

Rubber and Plastics 0 13 10 33 49

Leather 4 20 21 54 -69

Stone&Ceramic 1 4 12 20 -14

Primary metal 1 4 11 18 -39

Fabricated metal 1 4 8 13 -4

Industrial Machinery 0 1 11 31 14

Electronic 1 5 22 38 10

Transport 0 0 17 27 4

Instruments 0 3 12 22 10

Miscellaneous 6 19 23 58 -9

Average 2 6 15 28 -2

OLS IV

ΔEmpl it:t+5 ΔEmpl it:t+5

Log(empl it) -0.158*** -0.179***

Age it -0.001*** -0.004***

Log(TFP it) 0.023*** 0.026***

Log (K/Prod workers it) 0.008*** 0.007***

Non-prod/Prod wage bills -0.000001 0.000001

Other penetration -0.037*** -0.037***

Low wage penetration -0.840*** -0.515***

X log(TFP it) 0.104 -0.289*

X log(K/P it) 0.181*** 0.034

X N/P it -0.023 -0.150

Firm fixed eff Yes Yes

Year fixed eff Yes Yes

obs 323,569 246,855

R2 0.76 0.43

IV instrument Low wage penetration and Other penetration with tariff rates and lagged values

Conclusion

Low wage imports negatively affect employment growth of large firms

capital intensive firms suffer less from low imports in terms of employment growth

No significant result for skill effects Endogeneity of industry level imports is

accounted for using tariff rates

Biscourp and Kramarz for France

Distinguish between intermediate imports and imports of finished goods

Definitions:

finished good: when imported good coincides with that of importing firm (~outsourcing)

intermediate good: when imported good is different from that of importing firm

Include firm-level measures of innovation to control for skill biased technological change

:

: de

:

:

it it it it itL Tr Z S

with

L employment

Tr Tra growth

Z vector of economic shocks

S firmcharacteristics at beginning sample

Trade and Employment growth

Employment Growth

From all From EC Non-EC OECD Low wage

Δ (FG imports/sales it) -0.445** -0.432** -0.352* -0.517**

Δ (II imports/sales) -0.224** -0.239** -0.210 -0.161

Δ (exports/sales it) 0.103** 0.135** -0.027 0.054

Δ (local purchase/sales) -0.482** -0.482**

Growth of sales 0.745** 0.745**

Weighted by employ No ?o

R2 0.57 0.57

Trade and Unskilled workersChange in share of unskilled production workers in production workers

From all From EC Non-EC OECD Low wage

Δ (FG imports/sales it) -0.054** -0.028 -0.177** -0.072

Δ (II imports/sales) -0.071** -0.070** -0.197** 0.023

Δ (exports/sales it) -0.054** -0.042** -0.094* -0.090**

Δ (local purchase/sales) -0.034* -0.034*

Growth of sales 0.019** 0.019**

Weighted by employ Yes Yes

R2 0.179 0.180

Conclusion

Low wage countries do not have the negative role often described in the press

Firms importing finished goods (~outsourcing) destroy more jobs than those importing intermediates conditional on changes in local purchases

Exporting positively affects employment growth Results are robust to inclusion of technology variables

(Bloom et al) But! No controlling for endogeneity of imports and

exports

New event! The importance of China since nineties

may alter results China’s exports features some overlap

with production structures in developed countries

i.e. its effect may be more nefast on employment growth but may offer opportunities for skill upgrading

Hypothesis 1: Imports from China negatively affect firm employment growth

Hypothesis 2: Imports from China result in skill upgrading in developed countries

Imports from China, firm growth and survival and skill upgrading: Evidence from Belgium

G. Mion (LSE), H. Vandenbussche (UCL), L. Zhu (Kul)

Data ’96-2006 Education as a measure of skill at the firm-level allows within

firm skill upgrading Firm-level measure of outsourcing Distinction between final and intermediate imports

Methodology We distinguish China from other low wage countries Instruments for Trade (tariffs and exchange rates) Controls for innovation

Notes

Stylized facts: (1) Declining manufacturing employment

600

700

800

900

1000

1100

Em

ploy

me

nt

1970 1980 1990 2000 2010Year

Source: EU-KLEMS

Number of employees of Belgian manufacturing 1970-2005

Stylized facts: (2) Increasing share of non-production workers

Stylized facts: (3) More skilled labour force in manufacturing

.16

.18

.2.2

2.2

4S

hare

of s

kille

d w

orke

rs in

full

time

ente

rs/q

uite

rs

1996 1998 2000 2002 2004 2006Year

Source: calculated from BEL-FIRST; the upper line represents enters

Skill share of full time enters/quiters for Belgian manufacturing 1997-2006

Stylized facts: (4) Rising manufacturing imports from China and other low-wage countries

.01

.02

.03

.04

.05

Imp

ort p

enet

ratio

n

1994 1996 1998 2000 2002 2004Year

Note: The upper line is import penetration of China; mlanufacturing except sector 23

Import penetration of China and other low wage countries: Belgium 1995-2004

Literature:

Schott (2008) showed that China’s export similarity with OECD countries is higher than that of other non-OECD countries and this similarity is growing much faster than any other countries.

This finding highlights that firms in developed countries are much likely to face competition from Chinese exports rather than that from other low-wage countries' exports, since the later have much less similarity with their productions.

Data: main variables used Trade variables: -Industry-levl import share

-Firm-level outsourcing of finished goods

-Firm-level outsourcing of intermediate goods (similarly defined)

Firm characteristics:

-Size (log empl.)

-Average wage (wage bill/empl.)

-Labor productivity(value added/empl.)

-Capital intensity (tfa/empl.)

-Intangible capital intensity (itfa/empl.)

Trade and employment change (BJS, 2006) Econometric model:

=firm characteristics: size, labor productivity, capital intensity, intangible capital

intensity and average wage

=industry-level import share of different country groups

=firm-level outsourcing to different country groups (finished and intermediate)

=time fixed effects

=firm fixed effects

t

i

jtT

itT

itV

: 1 ' ' 'lnit

t ti jt it t i itemp c V T T

Table 2: trade and employment growth OLS IV industry IV industry and IV firm

(a)= 1% significant (b) =5% significance; (c) = 10 % significant

Table 3: trade and share of production workers OLS IV industry IV industry and IV firm-level trade

(a)= 1% significant (b) =5% significance; (c) = 10 % significant

Table 4: trade and skilled workers OLS IV industry IV industry and IV firm-level

(a)= 1% significant (b) =5% significance; (c) = 10 % significant

How much can Chinese imports explain skill upgrading?

Chinese imports alone can explain around 30% of the total skill upgrading in Belgian manufacturing during the period of 1996-2006

Trade and firm death

We estimate a linear probability model:

Whear Death is a dummy variable denoting firm death. We defined a firm as dead if it disappears from the data set in the next year or for the next two years.

' ' '

itit jt it t i itDeath c V T T

Table 5: Trade and firm death (1)

(a)= 1% significant (b) =5% significance; (c) = 10 % significant

Table 6: Trade and firm death (2)

Conclusions

Imports from low-wage countries are important in explaining employment growth in Belgian manufacturing

imports from China play more important role than that from other low-wage countries.

Firm-level outsourcing to China leads firms to upgrade their occupational composition of employment, although it does not affect the level of employment significantly.

Import competition from low-wage countries/China only has weak impact on firm death