Globalization, Technology and Inequality

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Globalization, Technology and Inequality

Lecture 4: Trade, O¤shoring and Inequality

Gino Gancia

July 5, 2012

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Trends in Wage Inequality

within-country wage inequality has increased in several countries in the past decades

some measures of wage inequality:

1 returns to college education or college premium

2 skill premium = wage of white-collar workers wage of blue collar workers

best-known case:

I US, 1980-2008: college premium +33%

international evidence more scattered due to lack of data:

I sample of 35 countries in the 1980s: skill premium +8% (Epifani &

Gancia, 2008)

I sample of 26 countries 1990-2005: college premium +7% (Parro, 2011)

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US Evidence: Skill Premium and Skill Supply

since the late 1970s, in the US both the skill premium and the relative

supply of skilled workers have increased...

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Trends in US Real Wages

...and the real wage of unskilled workers has declined/stagnated

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Main Explanations for Rising Wage Inequality

wage trends in the US motivated a large literature main explanations:

I Skill Biased Technical Change (SBTC)

I globalization

why globalization?

I timing: the last globalization boom started in the late 1970s

I the correlation between measures of wage inequality and a country openness (import +export

GDP ) is often positive

I Goldberg and Pavcnik (2007):

F trade liberalization in 1980s-90s!rising skill premia in Mexico, Colombia, Argentina, Brazil, Chile, India, Hong Kong

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Evidence: Trade and Returns to Education

HND

PER NLD

FIN

GTM S WE

K OR NLD

FIN PHL

ITA ESP

CYP THAVEN

NOR

NOR CHL

KENCAN CHE B RA SLVPOL

NOR AUSAUT

ITA

GRC B OL CRI

I DN CAN DNK

USA AUS GBR BRA P RY

JPN P ANGRC

B RA USA

P RTCOL NLD NLD SWE

AUT ITA PAK

GRC NLD MEX

SWE CHL P RTSWE

CHN

THA KOR

CRI

NLD GHA

PHL

FI N MEX

GTM NI C

-.10.1.2.3Period % Change in the Returns to Education

-.05 0 .05

Period Change in the Openness R atio slope coeff. = 1.23 (t = 2.90)

sample: 40 countries observed between early 60s and late 90s

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Evidence: Trade and the Skill Premium

PAN E GY

FIN P ER

KOR TZA

J PN ETH I TA

GRC CAN

GB RGTM

S WE USA B GD

CYP AUS DNK

IND P AK

DEUIRE COL E SP AUT

MEX

VEN

P HL URY

TUR

CHL LUX

FJI MYS

-.4-.20.2.4% Change in the Skill Premia

-.4 -.2 0 .2 .4

Change in the Openness Ratio: 1980-90 slope coeff. = 0.58 (t = 3.96)

sample: 35 countries observed between 1980 and 1990

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Evidence: Trade and Income Distribution

TTO MRT

J OR LKA

LSO

CIVLKA HKGTUN

J AM PAN

NLDLUX

JOR IDN VEN

DOM IRN SWE

B GD K OR

FIN FJ I ZMB

ITAGE R DNK P AK P ER PRT KOR ESP

THA CRI TZAGRC

NOR B RA

JPN NOR

PER BEL MUSGBR MEX PAK NZL

J PN BOL EGY VEN

PER

TZA PAK COLNOR DNKI ND JPN

AUS SLV BRA IND ZMB

NOR

ITA GTMGBR

M EX COL

V EN CAN

HNDDOM FRA BRAS LE

NLD MDG J PN I DN THA FIN

BGDP HL

TTO BGD GER

B RA AUS

FRA ETH J PN

ESP IND

SWE NOR

NOR ECU SEN BGD

IND NER

TTO

FIN PAN

PER CHL

LKA MDGIDN IND

FIN COL

CAN GB R ESP

B RA AUS S WE

CANJPN TUR CRIE CU

ITA PAK I RL FRA

GER PRTPRT

DNK GBR CRI

MEX NZL

IDN MLI

PAN GE RTHA DNK

MYSNZL P AK

FRA GA B DZA MEX

CAN CRI CHL

PHL

KOR SWE ZMB

COL GBR CAN

MYS NLD IDN ESP SLV

E SP CRI

K OR GRC B GD EGY TZA

CHL VEN THA TUN K OR

TUR

LKA

FIN

THA NLDNGA

I RLGHA

SWE PHL HND

LKA IDN

J AM DOM

HKG

VEN TUN P HL MEX SYC

HND BELTUN

K ORTHA

HKGMUS J OR

MYS NGA

MYS HKG

SGP

-.1-.050.05.1Period % Change in the Gini Coefficients

-.05 0 .05 .1 .15

Period Change in the Openness R atio slope coeff. = 0.13 (t = 2.40)

sample: 68 countries observed between the early 60s and the late 90s

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A Basic Framework

GE model with 2 sectors and 2 factors (high- and low-skill workers) aim:

I study the e¤ects of trade and technology on the skill-premium

CES utility

U = Y = ^h ( Y

_l

)

^e^e¹

+ ( Y

_h

)

^e^e¹

ⁱ

e e 1

, e > 0

I Y_h =skill-intensive good

I Y_l =low-skill intensive good

I e= elasticity of substitution between Y_l and Y_h

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Demand and Supply

to …nd relative demand, solve:

max

Yh,Yl

h

( Y

_l

)

^e^e¹

+ ( Y

_h

)

^e^e¹

ⁱ

e e 1

P

_h

Y

_h

P

_l

Y

_l

I P_h, P_l =prices of Y_h, Y_l

I FOCs:

Y¹^e (Y_h) ^e¹ =P_h ! ^Y^h

Y_l = ^P^h P_l

e

each sector employs one type of labor:

Y

_h

= A

_h

H and Y

_l

= A

_l

L

I H=supply of skilled workers, productivity A_h, wage w_h

I L=supply of low-skill workers, productivity A_l, wage w_l

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The Skill Premium

perfect competition

I price = marginal cost

P_h = ^w^h

A_h and P_l = ^w^l A_l

skill premium:

w

_h

w

_l

= ^P

^h

P

_l

A

_h

A

_l

I use ^P_P^h

l = ^Y_Y^h

l

1/e, Y_h=A_hH and Y_l =A_lL

w_h

w_l = ^A^h A_l

e 1

e L

H

1 e

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The Skill Premium: Determinants

determinants of the skill premium w

_h

w

_l

= ^A

^h

A

_l

e 1

e

L

H

1 e

1 technology:

F if goods are gross-substitutes(e>1), skill-biased technical change (higher ^A_A^h_l) increases ^w_w^h_l

F if e<1 it is the opposite, but this case is empirically less plausible

2 endowments:

F an increase in the relative supply of one factor reduces its relative reward, stronger e¤ect when e is low

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Trade and the Skill Premium

e¤ect of trade:

I similar to a change in endowments

integration between two identical countries:

I equal to doubling H and L

I no change in the skill-premium

integration between a skill-abundant North and a skill-scarce South : H

L > ^H + H L + L > ^H

L w

_h

w

_l

< ^w

^h

w

_l

trade

< ^w

^h

w

_l

I trade raises the reward of the relatively abundant factor

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N-S Trade and the Skill Premium

North-South trade can explain the increase in the skill premium in the North

yet, this mechanism fails to convince in practice why?

1 most of trade is between similar countries:

F the volume of N-S trade is considered too low (particularly in the 80s and 90s)

2 wage inequality has increased also in many less-developed countries

F see Goldberg and Pavcnik (2007)

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Epifani and Gancia (2008)

models of new trade theory with increasing returns (IRS) and monopolistic competition can explain:

I why trade between identical countries may increase wage inequality

I why trade may lead to a pervasive increase in skill premia

same framework as before, but:

1 skilled workers produce di¤erentiated goods with IRS

2 unskilled workers produce homogenous goods

e¤ect of trade: create bigger markets

I di¤erentiated goods are subject to IRS!bene…t more from bigger markets

I skill is more valuable in large global markets

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Skill-Intensive Sector

Y is a CES baskets of di¤erentiated varieties:

Y = y

_l^α

+ _∑

ⁿ_i₌₁

( y

_h,i

)

^{α 1/α}

, α 2 ( ^{0, 1} )

I n=number of skill-intensive varieties (endogenous)

I e=_1/(1 α) >1=elasticity of substitution

demand for any variety y

i

:

max

yi

[ Y ∑

ⁿi=1

p

_h,i

y

_h,i

p

_l

y

_l

]

I from the FOC, p_i =Y^{1 α}y_i^α ¹ :

y_i =p

1 α 1

i Y

I negative function of its own price, with elasticity σ=1/(1 α)

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Skill-Intensive Firms: Monopolistic Competition

one …rm = one variety, total cost function:

TC = ( F + cy

_h,i

) w

_h

I F = …xed cost, c = variable cost, all costs are in units of labor

prices set to solve:

max

p_h,i

π

h,i

= p

h,i

y

h,i

[ F + cy

h,i

] w

h

s.t. : y

_h,i

= p

1 α 1

h,i

Y

I …rm takes Y as given, FOC:

p_h,i =p_h = ^cw^h α

I markup over the marginal cost

I simplify: set c=α!^ph =w_h

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Firms’Scale and Number

Free Entry (FE) ! ^π

^h,i

= 0:

( p

_h

cw

_h

) y

_h

= w

_h

F ! ^y

^h

= ^F 1 c

I FE pins down …rm scale

I simplify: set F =1 c!^yh =1

labor market clearing (demand = supply):

( F + cy

_h

) n = H ! ⁿ = H

I with a …xed scale, an increase in H is accommodated by an increase in the number of …rms

L-intensive sector:

I single good, perfect competition:

y_l =L

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Trade and the Skill Premium

skill premium (use p

_i

= Y

^{1 α}

y

_i^α ¹

):

w

_h

w

_l

= ^p

^h

p

_l

= ^y

^l

y

_h

1 α

= L

^{1 α}

I skill premium is increasing in L and independent of H!

I why? an increase in H creates its own demand

e¤ects of trade:

I trade integration is like an increase in H and L

I new e¤ect: a bigger market can sustain a larger number of skill-intensive varieties!similar to SBTC?

I trade integration always increases the skill-premium!

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O¤shoring and Wages

we now introduce o¤shoring in a way inspired to:

I Grossman & Rossi-Hansberg (2006, 2008)

I Acemoglu, Gancia & Zilibotti (2012)

focus on o¤shoring of L-jobs (more relevant case)

I production of Y_l requires intermediates that can be separated geographically

I bene…t of o¤shoring: move production to low-wage countries (South)

I but only a fraction κ< ¯κ= _L+L^L of intermediates can be o¤shored

new result:

I o¤shoring of unskilled jobs can, in some cases, bene…t domestic unskilled workers!

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Introducing L-O¤shoring

preferences:

Y = ^h ( Y

l

)

^e^e¹

+ ( Y

h

)

^e^e¹

ⁱ

e e 1

I Y_l is a CES function of a unit set of intermediates

I intermediates[0, κ]are o¤shored to the South

Y_l = Z 1

0 y_i^αdi

1/α

=^h(1 κ)^{1 α}L^α+κ^{1 α}(L )^αⁱ^1/α

F we used y_i =L /κ and yi=L/(1 κ)

I no o¤shoring in the H sector: Y_h =H

wages:

I equal to MPL

w_h = ^∂Y

∂H =Y^1/eY_h ^1/e w_l = ^∂Y

∂L =Y^1/eY_l ^1/eY_l^{1 α}(1 κ)^{1 α}L^α ¹

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L-O¤shoring and the Skill Premium

w

_h

w

l

= ^L

1 α

Y

_h^1/e

( 1 κ )

^α ¹

Y

_l^{1 α 1/e}

e¤ects of κ:

1 direct e¤ect: less demand for L in North!higher skill premium

2 e¢ ciency e¤ect: higher Y_l ! (^?)

if tasks are su¢ ciently complementary (α < 1 1/e)

I wh

wl is a U function of κ

I why? recall ^∂Y^l^(κ^'0)

∂κ !∞, and ^∂Y^l^(κ_∂κ^'¯κ) !⁰

intuition:

I with enough complementarity, cost saving on[0, κ]increases the demand for workers on[κ, 1]too!lower skill premium

I but this e¤ect disappears as w_l !^wl

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L-O¤shoring and the Skill Premium

0.0 0.1 0.2 0.3 0.4 0.5

1.0 1.2 1.4 1.6

kappa wh/wl

e = 1.6, solid: σ = 5, dashed: σ = 1.25, σ = 1/ ( 1 α )

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Feenstra & Hanson (1997, 1999)

the removal of barriers to Foreign Direct Investment has triggered o¤shoring from US to Mexico

this relocation of economic activity can increase wage inequality in both countries

why? because o¤shored activity are low-skill intensive relative to US production, but skill-intensive relative to Mexican production

thus, the skill-intensity of production (and thus the demand for skill)

increases both in US and Mexico

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Alternative Approaches: Trade, Sorting and Inequality

so far, only two skill levels (H and L):

I in reality there are many skill levels and inequality has increased also within skill groups

I with more skill levels sorting (who works with who) becomes important

Trade, Sorting and Inequality:

I trade bene…ts disproportionately more productive …rms, more productive …rms hire more able workers!trade bene…ts relatively more high ability workers

F Yeaple (2005), Ohnshorge and Tre‡er (2007), Costinot and Vogel (2010), Helpman, Itskhoki, and Redding (2010, 2011), Monte (2011)

O¤shoring, Sorting and Inequality:

I globalization makes international teams of workers possible!"good"

workers in the South form teams with workers in the North!"bad"

workers in the South are segregated!their wage falls

F Antras, Garicano & Rossi-Hansberg (2006), Kremer & Maskin (2006)

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What Did We Learn?

trade/o¤shoring can a¤ect factor prices (the skill premium) in rich ways

trade (even between similar countries) may lead to a generalized increase in wage inequality

trade/o¤shoring can have e¤ects similar to (biased) changes in productivity

I trade may increase relatively more the productivity of skilled workers

I o¤shoring of labor-intensive tasks may increase the e¢ ciency of unskilled sectors

F but only if tasks are very complementary

I in more advanced models, trade can even trigger SBTC

Globalization, Technology and Inequality