Trade and Jobs in Europe: Much Ado about Nothing?

By Mathias Dewatripont; André Sapir et al. | Go to book overview

1. How Much Has LDC Trade Affected Western Job Markets?

RICHARD FREEMAN AND ANA REVENGA

Trade has long been seen as a key to European economic progress. Fifteen or so years ago, many believed that the Common Market was the cure to Europe's economic ills--a potential catalyst for growth that would create jobs and bring European countries to the frontier of modern technology. Economists studied trade flows among advanced countries, generating non-Heckscher--Ohlin theories to explain intra-industry flows among countries with comparable factor endowments. More trade presumably meant a better economic world.

Recent discussions of trade have taken a less rosy view. Trade with the less developed countries (LDCs) is, according to some, harming the economic prospects of low skill Western workers through high unemployment in Western Europe and through declining real wages in the USA. Prominent European figures, such as Sir James Goldsmith, have been sufficiently concerned with the potential adverse effects of LDC trade to favour a world in which EU countries would trade freely with other advanced countries but would establish barriers against trade with LDCs.

In the USA, concerns over the NAFTA treaty spawned considerable discussion and research on the effects of trade on the job market (see Journal of Economic Perspectives 1995, Fall). Some analysts employed 'factor content calculations' (essentially estimates of the labour displaced from imports) to assess the potential fall in demand for less skilled workers due to trade ( Borjas, Freeman and Katz 1992; Cooper 1994; and Sachs and Shatz 1994). Others have examined the relation between price changes and the skill composition of employment by sector ( Lawrence 1994; Sachs and Shatz 1994).

In Europe, empirical analysis of the links between trade and labour has been more sparse. Adrian Wood ( 1994) has made a case for trade having a huge effect on both European and American job markets. On the other hand, the OECD has argued that 'except in a few sectors like clothing and footwear, major job displacement from import competition cannot plausibly be linked to . . . developing countries' ( OECD 1994a: 37). More recently, the World Bank restated this position by claiming that 'on net, the effects of trade with developing and transition economies do not seem large enough to account for the massive shifts in labour demand that have occurred within the OECD' ( World Bank 1995b: 3). Academic debate over the effects of trade has been more muted in Europe than in the USA, in

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