TRADE WITH LOW WAGE ECONOMIES: THE IMPACT ON UK JOBS, WAGES AND PRODUCTIVITY

Over the last two decades, over three million jobs have been lost in UK manufacturing with particularly severe losses among low skilled workers. The concurrent upsurge in industrial imports, notably from the low wage economies of East Asia, has led to public concern that trade with these countries has played an important role in destroying British jobs.

But according to Robert Hine and Peter Wright of Nottingham University, writing in the September issue of the Economic Journal, imports from other OECD countries have had far larger and more immediate effects on productivity and labour costs than imports from East Asia. At the same time, trade with East Asia does seem to play a larger role in increasing the remuneration gap between the skilled and unskilled workers of the UK.

Most previous work has found that the net loss of jobs due to rising imports and exports has been small relative to jobs eliminated through higher productivity. In an econometric analysis of the impact on labour and product markets of the UK’s trading relationships, these researchers investigated whether the productivity improvement was itself affected by growing competition through trade. They found that:

Increases in trade volumes, both in terms of imports and exports, cause significant reductions in the demand for labour. This finding is consistent with the view that increased openness increases the efficiency with which companies use labour. But contrary to popular wisdom, imports originating from the EU and the US have more impact than imports from East Asia, as well as having a more immediate effect.
Increases in imports serve to moderate wage increases. But the same is also true of increases in the level of export activity, presumably reflecting the reduction in costs and prices necessary to gain increased market share overseas. Imports originating from the EU and the US again appear to have a more significant impact than imports from Japan and the rest of East Asia. At the same time, trade with East Asia does seem to play a larger role in increasing the remuneration gap between the skilled and unskilled.
The implicit productivity change is of course a double-edged sword as far as total employment is concerned: it may lead to job losses in the short term while securing jobs in the longer run. Trade with low wage economies may have displaced some jobs - often in labour intensive industries - but through its pro-competitive effect, it may have also had a strengthening effect on UK manufacturing performance.

Furthermore, Hine and Wright conclude, the impact of trade with low wage economies on the UK labour market - at least in relation to its productivity-enhancing effect - appears less marked than that of trade with the EU, which is of course still quantitatively much more important.

Note For Editors: ‘Trade with Low Wage Economies, Employment and Productivity in UK Manufacturing’ by Robert Hine and Peter Wright is published in the September 1998 issue of the Economic Journal. The authors are both in the Department of Economics, University of Nottingham, Nottingham NG7 2RD. Their research was supported by the Economic and Social Research Council (ESRC).

For Further Information: contact department secretary Sue Berry on 0115-951-5470 (email: lezsb@len1.nott.ac.uk); or RES Media Consultant for Economics Romesh Vaitilingam on 0117-983-9770 or mobile 0468-661095 (email: romesh@compuserve.com).