Policy Brief

Trade Liberalization and Intersectoral Labor Movements

Romain Wacziarg and Jessica Seddon Wallack

Policy Brief prepared by Joyce Lawrence, MPIA 2008

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Description:

Both advocates and opponents of free trade in the U.S. regularly claim that workers in industries that are not internationally competitive will lose their jobs with increased openness to trade. However, the authors find that the impact of trade liberalization on labor movements among sectors has been largely overstated. They argue that labor shifts are either absent, unobservable, or counteracted by other policies.

Policy Brief:

Economists agree nearly unanimously about the benefits of free trade. Theory suggests a number of channels for gains from trade. Classical trade models argue that the gains from trade come from moving resources toward sectors in which a country has a comparative advantage. Several alternative theoretical models suggest that the effects of liberalization do not necessarily come from labor movements, but rather from productivity improvements, increases in the scale of production, or increased competition.

The public view of free trade is mixed, with much of the debate centered on the potential for transitional job loss. Both advocates and opponents of free trade in the U.S. regularly claim that workers in industries that are not internationally competitive will lose their jobs with increased openness to trade. Proponents emphasize the long-term efficiency benefits while opponents look at the potential for increased unemployment among certain groups.

However, in Trade Liberalization and Intersectoral Labor Movements, authors Romain Wacziarg and Jessica Seddon Wallack find that the impact of trade liberalization on labor movements among sectors has been largely overstated. They find limited evidence of increased labor reallocation after trade liberalization.

There are a number of possible explanations for this finding. One may be that the classical assumption of labor mobility is violated in practice because it is costly for workers to find new jobs in another sector. The effects of trade could also be muted by countervailing effects of other simultaneous policies. Countries that enacted trade liberalization in conjunction with other policies that might limit labor reallocation did display lower intersectoral movements after liberalization. In countries that did see increased labor reallocation, the effects of trade liberalization were difficult to distinguish from the effects of other simultaneous reforms. Extensive reforms that include deregulation and privatization have greater effects on labor movements among sectors than trade reform alone.

While this paper does not talk about intrasectoral effects or analyze other gains from trade beyond structural adjustment, the finding does provide some evidence to lessen concerns about job loss due to structural change after trade liberalization.