SHOULD LABOR BE WORRIED? THE SHOULD LABOR BE WORRIED? THE EFFECT OF FREE TRADE ON EFFECT OF FREE TRADE ON EMPLOYMENT OF LABOR IN A EMPLOYMENT OF LABOR IN A

DEVELOPED ECONOMY - A CASE DEVELOPED ECONOMY - A CASE STUDY OF THE UNITED STATES STUDY OF THE UNITED STATES

MANUFACTURING SECTORMANUFACTURING SECTOR

BUSOLA IYELA BUSOLA IYELA

APRIL 21 2009 APRIL 21 2009

MOTIVATIONMOTIVATION

The motivation for this study has been the ongoing debates The motivation for this study has been the ongoing debates and deadlocks in the Doha Development Rounds. and deadlocks in the Doha Development Rounds.

This is the current trade-negotiation round of the world This is the current trade-negotiation round of the world trade organization (WTO) which commenced in November trade organization (WTO) which commenced in November 2001. Its objective is to lower trade barriers around the 2001. Its objective is to lower trade barriers around the world, which will allow countries to increase trade globally.world, which will allow countries to increase trade globally.

As of 2008, talks have stalled over disagreements on major As of 2008, talks have stalled over disagreements on major issues, The most significant differences are between issues, The most significant differences are between developed nations led by the European Union, and the US developed nations led by the European Union, and the US and the major developing countries led by India China and and the major developing countries led by India China and Brazil. Brazil.

PREVIOUS RESEARCHPREVIOUS RESEARCH

Who voted against NAFTA? Trade Who voted against NAFTA? Trade unions versus free trade. Conybeare, unions versus free trade. Conybeare, J., Zinkula, M., (1996)J., Zinkula, M., (1996)

Trade liberalization and labor Trade liberalization and labor demand elasticites: evidence from demand elasticites: evidence from Turkey. Krishna,P. Mitra,D., 1998 Turkey. Krishna,P. Mitra,D., 1998

Some reasons why labor in developed Some reasons why labor in developed economies oppose free tradeeconomies oppose free trade

Free trade will decrease employment Free trade will decrease employment of laborof labor

Free trade will decrease labor rights Free trade will decrease labor rights and standardsand standards

Free trade will decrease the wage Free trade will decrease the wage rate of labor workersrate of labor workers

Objective of the studyObjective of the study

The objective of this is to determine The objective of this is to determine the effect free trade will have on the effect free trade will have on employment of labor in a developed employment of labor in a developed economy, namely the US economy, namely the US

Empirical QuestionEmpirical Question

Does free trade have an effect on Does free trade have an effect on employment of workers in the employment of workers in the manufacturing sector of the US?manufacturing sector of the US?

Does free trade decrease employment in Does free trade decrease employment in the manufacturing sector of the US?the manufacturing sector of the US?

Expected contributionsExpected contributions

To provide more evidence on the effect To provide more evidence on the effect globalization and trade openness is going globalization and trade openness is going to have on the labor force of a developed to have on the labor force of a developed country.country.

To determine if labor’s worries are To determine if labor’s worries are justified.justified.

Measures for Free TradeMeasures for Free Trade

Free trade is trade between 2 or more countries Free trade is trade between 2 or more countries without trade barriers such as subsidies, taxes, without trade barriers such as subsidies, taxes, tariffs and non-tariff barriers. Eg NAFTA, ASEAN, tariffs and non-tariff barriers. Eg NAFTA, ASEAN, AFTA.AFTA.

Peer literatures have measured free trade as Peer literatures have measured free trade as X/GDP, M/GDP or (X+M)/GDPX/GDP, M/GDP or (X+M)/GDP

For this study I have used M/GDPFor this study I have used M/GDP

Empirical frameworkEmpirical framework Employment = f (Earnings, Gdp, FreeTrade, Employment = f (Earnings, Gdp, FreeTrade,

Education,Education, - + - -- + - -

Union, Exports, Imports, Age, Population).Union, Exports, Imports, Age, Population).

+ + - - ++ + - - +

In the Heckscher-Ohlin model of trade, a country exports In the Heckscher-Ohlin model of trade, a country exports the commodities that uses its relatively abundant the commodities that uses its relatively abundant production factor more intensively. On the assumption that production factor more intensively. On the assumption that developed countries are not relatively labor abundant, they developed countries are not relatively labor abundant, they do not have a comparative advantage in the production of do not have a comparative advantage in the production of labor-intensive commodities. Consequently, as imports labor-intensive commodities. Consequently, as imports from labor intensive countries increase due to free trade, from labor intensive countries increase due to free trade, exports decrease and this in turn will should decrease the exports decrease and this in turn will should decrease the number of people employed. number of people employed.

Model Estimation Model Estimation

ln Employment = β0 + β1 (lnEarnings) + β2 (lnGdp) ln Employment = β0 + β1 (lnEarnings) + β2 (lnGdp) + β3 (lnFreeTrade) + β4 (Education) + β5 (Union) + β3 (lnFreeTrade) + β4 (Education) + β5 (Union) + β6 (Exports) + β7 (Imports) + β8 (lnAgeA) + β9 + β6 (Exports) + β7 (Imports) + β8 (lnAgeA) + β9 (lnAgeB) + β10 (lnPopulation) + U (lnAgeB) + β10 (lnPopulation) + U

Earnings = Average Hourly earnings of manufacturing workersEarnings = Average Hourly earnings of manufacturing workers GDP = Real Gross Domestic Product of the USGDP = Real Gross Domestic Product of the US Free Trade = ratio of the sum of imports to the real gross domestic product Free Trade = ratio of the sum of imports to the real gross domestic product

of the United States (M/GDP) of the United States (M/GDP) Education = percentage of population with High school degrees and overEducation = percentage of population with High school degrees and over Union = union membershipUnion = union membership Exports = manufactures export as a percentage of merchandise exports Exports = manufactures export as a percentage of merchandise exports Imports = manufactures imports as a percentage of merchandise imports Imports = manufactures imports as a percentage of merchandise imports Age = two sub groups – 25to 64 and 65 and over Age = two sub groups – 25to 64 and 65 and over Population = total number of people in the United States Population = total number of people in the United States

DataData

Annual data : 1964 – 2005Annual data : 1964 – 2005 10 Variables 10 Variables

Data SourcesData Sources United states Bureau of Labor statistics – United states Bureau of Labor statistics –

www.bls.gov United States census Bureau – United States census Bureau – www.census.gov The world resource institute – The world resource institute – www.wri.org Unionstats.comUnionstats.com Haver analytics database.Haver analytics database.

ResultsResults

Parameter Parameter estimatesestimates

standard errorsstandard errors

Free TradeFree Trade 0.28007*** 0.28007***

0.096920.09692

EarningsEarnings 0.60141*** 0.60141***

0.18028 0.18028

GdpGdp 1.37646*** 1.37646***

0.25416 0.25416

UnionUnion 0.02889***0.02889***

0.00735 0.00735

ExportsExports 0.00459**0.00459** 0.00209 0.00209

Age A (15-64)Age A (15-64) --5.27949***5.27949***

0.91429 0.91429

Age B (65 and oAge B (65 and o -1.66091** -1.66091** 0.71123 0.71123 PopulationPopulation -1.11710*-1.11710* 0.72829 0.72829

***significant at 1%; ** significant at 5%; * significant at 10%.

Results contd.Results contd.

The key variable of Free Trade, shows a statistically The key variable of Free Trade, shows a statistically significant effect on employment at the 1% level. A 1% significant effect on employment at the 1% level. A 1% increase in Free trade will increase the number of people increase in Free trade will increase the number of people employed in the manufacturing sector of the United States employed in the manufacturing sector of the United States by 0.28007%. by 0.28007%.

This result is not consistent with economic theory as it is This result is not consistent with economic theory as it is expected that the coefficient will have a negative sign and expected that the coefficient will have a negative sign and a removal of trade barriers will have a negative effect on a removal of trade barriers will have a negative effect on employment of labor in the manufacturing sector. This employment of labor in the manufacturing sector. This result is, however, consistent with prior studies as it has result is, however, consistent with prior studies as it has been found that the link between free trade and been found that the link between free trade and employment as theory suggest to be empirically weak. employment as theory suggest to be empirically weak.

ConclusionConclusion From the above results, we can reject the null hypothesis and From the above results, we can reject the null hypothesis and

accept that free trade does have an effect on labor accept that free trade does have an effect on labor employment in the manufacturing sector of the United employment in the manufacturing sector of the United States. States.

should labor of a developed economy which is non labor should labor of a developed economy which is non labor intensive be worried about the adoption of free trade intensive be worried about the adoption of free trade because they feel employment will be decreased and they because they feel employment will be decreased and they may lose their jobs? This study shows that the answer is no. may lose their jobs? This study shows that the answer is no.

Evidence shows that since the signing of the North American Evidence shows that since the signing of the North American Free Trade Agreement, the number of manufacturing jobs in Free Trade Agreement, the number of manufacturing jobs in America has remained steady, with manufacturing employing America has remained steady, with manufacturing employing 18.3 million people in 1994 and 18.4 million people in 1999. 18.3 million people in 1994 and 18.4 million people in 1999. Rather than a decrease in the number of people employed Rather than a decrease in the number of people employed we see an increase. Therefore efforts should be made to we see an increase. Therefore efforts should be made to promote the adoption of free trade policies around the globe promote the adoption of free trade policies around the globe as the pros of this adoption outweigh the cons.as the pros of this adoption outweigh the cons.

Interesting Note – Statement Made by the Interesting Note – Statement Made by the Director general of WTO – April 14 2009.Director general of WTO – April 14 2009.

Indeed, the best contribution to reviving economic Indeed, the best contribution to reviving economic growth around the world is to conclude the DDR as growth around the world is to conclude the DDR as this will be one of the most appropriate collective this will be one of the most appropriate collective stimulus packages. An ambitious and balanced stimulus packages. An ambitious and balanced conclusion to the Doha Development Round, which conclusion to the Doha Development Round, which is needed now more than ever, could result in tariff is needed now more than ever, could result in tariff cuts of at least US$ 150 billion per annum, which cuts of at least US$ 150 billion per annum, which could directly benefit the consumers. And as I have could directly benefit the consumers. And as I have said many times, completing the DDA is also the said many times, completing the DDA is also the surest way we have of safeguarding our individual surest way we have of safeguarding our individual trade interests and the multilateral trading system trade interests and the multilateral trading system

against the threat of an outbreak of protectionismagainst the threat of an outbreak of protectionism..

Further Research DirectionFurther Research Direction

The effect of Free Trade on Labor rights and The effect of Free Trade on Labor rights and standards in both developed and developing standards in both developed and developing economieseconomies

The effect of free trade on wage rates.The effect of free trade on wage rates.