GLOBALISATION AND NEW TECHNOLOGY: IF THE UNSKILLED ARE THE VICTIMS, THESE ARE THE VILLAINS

The twin phenomena of globalisation (as indicated by rapidly growing world trade) and new technology are to blame for the eroding relative wages and employment conditions of less skilled workers in the developed world. That is the conclusion of Professor Joseph Francois of Erasmus University and Professor Douglas Nelson of Tulane University, writing in the September issue of the Economic Journal.

Francois and Nelson note that in recent years, public debate over trade policy in the OECD countries has become focused on the impact of trade on wages and employment. Indeed, in many circles, it could be argued that the employment effects of trade now dominate its effects on economic growth as a measure of social welfare and policy desirability.

For example, during the negotiation and final approval process for the NAFTA, organised labour interests in the United States and Canada continuously voiced their concerns over relative wage disparities and future labour force growth in Mexico. These concerns were echoed in both the US Congressional debate and in the advertisements purchased by NAFTA’s opponents. Similar concerns have been voiced in Western Europe over the Eastern enlargement of the EU and trade with developing countries. These issues will also feature prominently in the next multilateral trade round.

The concerns about trade and eroding labour market conditions stem from the perceived linkages between the forces of globalisation and recent labour market trends. Since the 1980s, the OECD has witnessed a deterioration in the relative earnings of unskilled labour, and a worsening of employment conditions for those same workers. In the public mind (and in the minds of many economists), the phenomenon of globalisation (and in particular rapid and coincident growth in world trade) is an obvious smoking gun in the search for suspects.

Francois and Nelson ask whether the link between trade and wages is as obvious as many believe. The basic intuition behind the notion that ‘it must be trade’ is formalised in the classic 2-good, 2-factor Heckscher-Ohlin trade model, which is standard fare in most international economics courses. The Heckscher-Ohlin model has been a powerful tool for explaining concepts like comparative advantage and the cost of protection. It is a logical starting point for trade economists working on trade and wages. In this framework, the theory predicts rather directly that if prices are driven down for unskilled labour-intensive goods (an assumed by-product of trade with low wage countries), there will be unskilled wage erosion in skill-intensive countries (that is, the OECD countries).

While seemingly a plausible explanation, in actuality the evidence is mixed. In the case of trade and wage linkages, use of the 2x2 Heckscher-Ohlin model as a pedagogical tool amounts, to some extent, to assuming the result at the outset. In addition, the theoretical point does not mesh well with the actual evidence. The same model also makes predictions about related trends, like shifts in the sectoral composition of employment. These shifts in resource allocation and employment patterns are related to the economy-wide or general equilibrium mechanics that link trade (and hence goods prices) to labour incomes. When economists turn to these economy-wide resource allocation patterns, they find that they not fully consistent with the Heckscher-Ohlin story about trade and wages.

This suggests two things: (1) the 2x2 model is too simple, and underplays important factors at work in OECD labour markets; and (2) there is another villain at work on the stage. This second villain is technology.

Francois and Nelson examine recent empirical research on these linkages. This work supports the more complex version of the story, including the importance of new technologies. As with all good crime dramas, the attribution of blame proves a difficult matter. We can blame trade for some erosion in the employment conditions for less skilled workers, though the mechanism is more complex than simple theory allows. At the same time, the evidence points strongly to technology as a key villain in the drama.

Note for Editors: ‘Trade, Technology, and Wages: General Equilibrium Mechanics’ by Joseph F Francois and Douglas Nelson is published in the September 1998 issue of the Economic Journal. Francois is Professor of Economics at Erasmus University in Rotterdam; Nelson is at Tulane University in New Orleans.

For Further information: contact RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or mobile 0468-661095 (email: romesh@compuserve.com); or Joseph Francois on 00-31-10-408-1256/1391 (home: 00-31-65-349-9741; fax: 00-31-10-452-5808; email: francois@few.eur.nl)