International Trade And Labor Market

The traditional trade theories are based on the assumption of perfect labormarket, which means full employment, labor mobility without any obstacles, andemployment process completes instantaneously without any cost. Under theseassumptions, the analysis of the employment problem was first excluded from themodel; Secondly, because there is no frictions, the equilibrium wage is determinedby the marginal product value, so the homogeneous labors get equal wages in allsectors, therefore, the wage inequality has nothing to do with trade, trade can onlyexplain the distribution effect between factors, such as the Stolper-Samuelsontheorem; Furthermore, as every country has a perfect labor market, the labor marketcondition does not have any impact on trade.However, in reality, the labor market in the world is far from ferfect, there arealways some problems, such as high unemployment rate, a widening incomeinequality. As for China, in recent years, China showed an upward trend in urbanunemployment rate, and the unemployment problem is dominant by thephenomenon of graduates having difficulty in finding a job while being shortage inmigrant workers. The distribution problem is a prevailing social issue nowerdays.On the one hand, the distribution beween labor and capital shows an imbalance, thelabor share in the national income declines; on the other hand, the wage inequalitybetween different groups of labor goes up.All these phenomena are associated with the growth of the internationalglobalization, the rapid development of world trade. So, the questions we want toask are: If the labor market is not perferct, will the labor market differences betweencountries have an effect on the performance of trade by releasing the assumption ofperfect labor market? On the other hand, due to the imperfectness of labor market,companies need to pay the additional cost of hiring workers, and workers also needto pay additional costs to find a job, as the open up to trade has reallocation effect on factors, then, will the trade impact the employment and wages? And how does thiseffect depend on the labor market condition?In order to answer all these questions, based on the existence of labor marketimperfectness, this paper research on the perspect of mathing efficiency between thejob seekers(often the unemployed) and vacancies of firms. Empirically, theefficiency of labour markets is often analysed by estimating matching functions. Thematching function is based on the idea that because of various frictions in the labourmarket the unemployed can find jobs and vacancies can be filled only after a delay.This process can be approximated by a functional relationship, which is analogousto an aggregate production function. The matching efficiency influences the cost oflabor and firms directly. Which may have effect on operating performance, factorinput dicisions of firms, willingness to seach for a job the bargaining power in wagenegotiations of workers. Therefore, the level of labor market matching efficiencycan affect the export performance and thus become another source of comparativeadvantage. Furthermore, the matching efficiency can also affect a country’semployment issues.The first chapter is the research background, describes the characteristics of thelabor market imperfectness, including the whole world and especially China. Thiswas reflected in the rise in unemployment, widening gap in income inequality and soon. And then, the possibility of a link between trade liberalization and labor marketissues is discussed.The second chapter is the literature review. First, the limitations of the perfectlabor market assumption of traditional trade theories are studied. The problem ofunemployment does not exist in traditional trade theories, and onlyStolper-Samuelson theorem talked about the issue of distritution effect betweenfactors within a country. Secondly, if the labor market frictions are considered, theconclusions of the traditional trade theories face challenges by recent literatures. Theconclusions of traditional trade theories need to be corrected, or even not valid. Then,some models based on the new new trade theory and labor market search frictionsare introduced. Finally, the search and matching theory and the methodology forassessing the efficiency of matching is discussed. A two-sector general equilibrium model is developed in chapter four, in whichequilibrium unemployment arises endogenously because of trading frictions in thelabor market. If employment volatility is the character of an industry while thematching efficiency reflecting the overall efficiency of a country’s labor market, thecountry with a high labor market efficiency of matching will have a comparativeadvantage in the high employment volatility industry. Futhermore, the impact oftrade on employment depends on the labor market matching efficiency, and a lowefficiency of matching will weaken the strength impact of trade on employment.In chapter four, the link between employment volatility, labor market matchingefficiency and comparative advantage of export is studied. Based on thecross-sectional data of29provinces and28manufacturing industries, we find thatthe provinces with high efficiencies of matching display a comparative advantage inhigh employment-volatility industries. This is due to the fact that the industries withhigh volatility of employment depend more on the effectiveness of labor allocationmechanism. Only the areas with high efficiency of matching can ensure lowemployment costs and therefore better performance of export.Chapter five deals with the impact of trade on employment, in the present oflabor market matching efficiency. Using panel date of27EU countries between1995and2008, this paper find that the direct impact of trade liberalization on totalemployment growth is positive, but the indirect effects of trade liberalization onemployment growth depends on the matching efficiency of the labor market. Lowefficiency of matching will weaken the positive effect of trade on employmentgrowth. The total impact of trade liberalization on employment growth depends onthe sum of direct effects and indirect effects. While the matching efficiency of labormarket is too low, the positive effect of trade liberalization may be reversed.The skilled labor needed by the general trade has a higher bargaining powerdue to the replacement cost, which is the result of investment in screeming workers,while the unskilled labor needed by the manufacturing trade has a lower bargaining.So, general trade will be more conducive to the relative wages of skilled labor thanthe processing trade. In addition, the general trade mainly due to the comparativeadvantage of technology, while the manufacturing trade favored by China’s abundant labor endowment, so, on the other hand, China’s large manufacturing tradeshare stimulates the demand towards the unskilled workers.Using China’s panel dataof33industries during2001-2008, this paper investigates the effect of general tradeand manufacturing trade on wage inequality. The estimation results show that on thewhole the open-up policy enhances the relative wage of skilled workers. Specifically,the increase of general trade exports will increase the skill premium in high generaltrade share industries while the impact ofprocessing trade is not significant. The lastchapter is the conclusions and policy recommendations.