Navigation

Trade and labor market outcomes in developing countries

 

The project aims to analyze how international trade impacts the creation of employment opportunities both, in the formal and informal sector to identify the policies that would moderate the negative effects of globalization and maximize its benefits.

​​​​About the project

Background

Globalization poses both risks and opportunities for developing countries. Access to new markets for exporting firms in low and middle income countries potentially creates employment and increases the salary of workers in those sectors. Local firms can also access better inputs and technology, helping to close the productivity gap observed in most developing countries. However, for gains from trade to materialize, resources need to be reallocated from less to more productive activities. In the presence of imperfect labor markets it is not clear that the gains from trade will be observed. Even more, globalization can increase unemployment, poverty and income inequality in the short and medium term, making it unsustainable socially, economically, and politically. This suggests that the relationship between international trade and labor market outcomes is complex and that there are important complimentary between trade and labor market policies. The overall effect of globalization in a developing country may depend on the provision of complementary policies, institutions, and infrastructure, highlighting the importance of public policies.

Objectives

The objective of this project is to thoroughly analyze the challenges and opportunities created by globalization in developing countries. The emphasis of the program is on the effects of international trade in domestic labor market outcomes, that is, the creation of employment opportunities both in the formal and informal sector, the effects on unemployment and the impact on wages. We will also assess the subsequent impact on poverty and inequality. The research also seeks to identify the policies that would moderate the negative effects of globalization and maximize its benefits. We will study the role played by skill development policies, the provision of transport infrastructure, labor market reforms, and export promotion policies.

Relevance

The main beneficiaries of this research will be policy makers in developing countries working in trade and labor market policies and academic researchers working in labor economics, international trade, and development economics. The developing countries partners in this research consortium are in excellent condition to maximize the positive policy and development impact of this research program. This project will generate a series of outcomes that will benefit policy makers currently seeking improved capabilities to deal with effective labor market reform, skill development, and export promotion. It will also help trade negotiators better understand how trade and labor issues should be linked in regional and multilateral trade agreements. The project will generate a better understanding of the constraints faced by poor households to participate in the formal economy and in the dynamic export sector.

Highlights and most important results

Module 1: Trade and labor mobility costs

Research Highlight 1: On average, the labor mobility costs in developing countries are equivalent to 3.71 times the annual wage. The highest costs are estimated in Sub-Saharan Africa (4.00) and Eastern Europe and Central Asia (3.95).

Research Highlight 2: We estimate labor mobility costs for 56 countries. The lowest estimated costs are in Estonia, Finland, and Germany; the highest costs are in Jordan, Philippines, Bangladesh, and Mauritania.

Policy Highlight 1: The magnitude of the labor mobility costs matters for the responses of the economies to a trade shock. Typically, countries only reach the new equilbrium after 6 years and the higher the mobility costs are, the longer this transition takes.

Policy Highlight 2: The imperfect adjustment to trade shocks is costly. On average, the costs of adjustment to a trade shock in the food sector are as high as the actual welfare impacts caused by that shock.

Module 2: Wages and employment gains from exports

Research Highlight 1: In Ghana, the firms that mostly benefited from AGOA are composed of blue collar workers who are involved in transient activities that generate a small export premium.

Research Highlight 2: In Ghana, exports opportunities from AGOA appear to have primarily benefited unskilled male workers with initially lower wages working in small firms.

Research Highlight 3: We find strong evidence of a wage premium among exporting firms in 61 developing countries, including low-income countries

Research Highlight 4: We provide strong support for the operating mechanisms advocated in the literature: export markets demand high quality products and the production of high quality products requires high-quality, skilled labor, high-quality, imported inputs, high-quality, sophisticated machine, and high-quality, productive firms.

Research Highlight 5: We establish a link between the income level of the destination countries and the level of average wages in the exporting country across the world economy. We find robust evidence that, worldwide, industries that ship products to high-income destinations do pay higher average wages.

Research Highlight 6: We explore the operating mechanisms and find robust evidence in support of a dual link. First, industries that ship products to high-income destination export higher quality goods. This is because high-income countries demand high-quality products. Second, the provision of quality is costly and requires more intensive use of higher-wage skilled labor. As a result, the production of higher quality products at the industry level creates a wage premium and conduces to higher average industry wages.

Policy Highlight 1: In developing countries, trade policies that seek to reach wage earners must be designed with a clear understanding of the exporting country’s labor market structure, firm management to workers structures, and the human capital available to perform the exporting activities.

Policy Highlight 2: Trade preferences should be strengthened, enhanced and improved to ensure that trade and investment may be channeled towards medium manufacturing sectors with export potential in a durable manner. However, this would require making provisions more permanent to encourage investors to make long-term commitments.

Policy Highlight 3: Exports can be an effective instrument to transmit some of the gains from globalization to workers, both in terms of higher employment and wages.

Policy Highlight 4: Policies that facilitate quality production, such as education and training programs, can enhance the gains from exporting.

Policy Highlight 5: Exports can be an effective instrument to transmit some of the gains from globalization to workers, both in terms of higher employment and wages.

Policy Highlight 6: Policies that facilitate quality production, such as education and training programs, can enhance the gains from exporting.

Module 3: Trade and unemployment in developing countries

Research Highlight 1: The impacts of trade liberalization in developing countries largely depends on the scope of adjustment of households and workers, on consumption decisions, production decisions and labor market decisions.

Research Highlight 2: Using data from the Mexican Encuesta Nacional de Ingresos y Gastos de los Hogares, we find that the structure of agricultural labor markets matters. In particular, the responses of wages, and the gains from trade, depend on the segmentation of labor markets and on spillovers across those markets.

Policy Highlight 1: Policies that facilitate adjustment in consumption and production can boost the gains from trade.

Policy Highlight 2: Spillover in labor markets are particularly relevant in determining the gains from trade and in shaping the distribution of those gains.

Module 4: Trade and informality in developing countries

Research Highlight 1: In the city of São Paulo, Brazil, children that start working while studying have a lower improvement in learning compared to children that only study. The results also show that the negative impact of working last in the subsequent years even if the children quit working.

Research Highlight 2: In Brazil, informal unskilled workers are more likely to sue their employers compared to skilled workers. For that reason the wage gap between formal and informal jobs are substantially higher among unskilled workers.

Policy Highlight 1: Policies that curb incentives for children to work such as conditional cash transfers and Bolsa Brazil, or that put more resources into teaching children that work are necessary to provide equal access to education to children from low income families.

Policy Highlight 2: In countries with active labor courts and where unskilled workers are more likely to sue it is important to address problems of informality of unskilled workers so that informal labor markets are not used as an escape valve to regulations in the formal labor market.

Geographic scope

  • Bolivia
  • Brazil
  • Ghana
  • Kenya

Research consortium

Gran​​​tees

  • Prof Dr Marcelo Olarreaga, University of Geneva
  • Prof Nicolas Depetris, University of Applied Sciences Western Switzerland
  • Dr Guido Porto, African Center for Economic Transformation (ACET), Ghana
  • Dr Vladimir Ponczek, Escola de Economia de São Paulo, Fundaçao Getulio Vargas, Brazil

Coordi​​​nator

  • Prof Dr Marcelo Olarreaga, University of Geneva

Partners​​hips

  • University of Nairobi, Kenya
  • Universidad Mayor de San Andrés, Bolivia
  • CIESS-Econometrica, Bolivia

Project website and link to P3

 

 

 

Further information on this content

 Contact

Prof. Dr. Marcelo Olarreaga University of Geneva School of Economics and Management
Boulevard du Pont-d'Arve 40
CH-1211 Genève 4 +41 22 379 98 78 marcelo.olarreaga@unige.ch