Trade and Jobs in Europe: Much Ado about Nothing?

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

4. Growing World Trade: Causes and Consequences

PAUL KRUGMAN

The rapid growth of NIE exports has more or less coincided with some disturbing trends in OECD labour markets: a sharp rise in wage inequality (especially in the USA) and a sharp rise in unemployment (mainly in Europe). It is widely believed that the unfavourable labour market trends and the growth of NIE trade are connected.

This belief has been expressed at greatly varying levels of sophistication. At one end there is the phenomenon of a self-made billionaire-turned-politician, who has declared himself an expert on economics and launched a campaign to warn his countrymen of the impoverishment they face as a result of free trade with low- wage nations. I refer, of course, to Sir James Goldsmith, whose book The Trap has been a European best-seller. While one might dismiss Sir James and his untitled Texan counterpart as marginal, milder versions of the same warning are found among highly respected and influential people. Even the European Commission, in its 1993 White Paper Growth, Competitiveness, Employment, attributed a major share of the rise in European unemployment rates to the fact that 'other countries are becoming industrialized and competing with us--even on our own markets--at cost levels which we simply cannot match' ( Commission of the European Communities 1993:4).

Academic research has been far less supportive of the claim that NIE manufactures exports are a major source of problems in OECD labour markets. While there are some studies that do claim to find evidence for substantial pressure from low-wage imports on unskilled labour in advanced countries, it is probably fair to say that a preponderance of the research to date suggests that the impact of third world exports on first world labour markets has been small, or at least elusive. (See, in particular, Wood 1994; and Leamer 1993 and 1994 in support of the adverse effects of NIE exports, and Katz 1992-3; Bhagwati and Kosters 1994; and Sachs and Shatz 1994 for the alternative view.)

One thing that is conspicuously lacking in the literature to date, however, is a consistent picture of the interaction between labour market developments in the high-wage countries and the growth of exports from the low-wage countries. While some (though not all) of the studies are based on a consistent underlying model of employment and wages in the advanced countries, there does not seem to be any effort to show how wages and employment in the advanced countries, and trade

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