Sunday, January 21, 2007

Trade and Jobs

. Sunday, January 21, 2007

The Economist (might be gated) has a nice discussion of trade's impact on workers in the US and EU. They highlight an important difference in how trade shapes employment in the two economies: "In America, where labour markets are flexible, the impact (of trade) is felt on wages more than employment. In Europe fewer trade-displaced workers find new jobs quickly, but those who do take less of a pay cut. One study suggests that, during the 1980s-90s, 65% of manufacturing workers in America who lost their jobs to freer trade were employed two years later, but most took a pay cut. A quarter suffered pay losses of more than 30%. In Europe during the 1990s, in contrast, less than 60% of workers in the same situation had found a new job, but only 7% saw their pay fall more than 30%."

Any one who took POLI 401 last fall care to explain why?


Matt Richmond said...

O fun, I love acting like a know it all.

It's because Europe has a much more rigid structure of employee protection. When someone in Europe gets fired they have to be notified as many as 8 months or more before they can actually be let go. There are also a lot more rules regarding WHY you can fire someone there. All in all (it's just another brick in the wall), European companies just have a much more difficult time letting go of workers. This makes companies think twice about hiring someone new because they know how difficult it will be to get rid of them if they need to.

There are also the unions, which play a much latger role in Europe than they do (today) in America. They both add to the difficulty of firing workers while also constantly pushing wages up (or even just holding them where they are instead of letting them drop). This is why workers in Europe would not have as much of a problem with facing pay cuts if they can actually find a job. Chances are they will have an extremely difficult time finding one though due to the high wages companies are having to already pay workers and the disincentive of knowing they can't fire them easily.

Compare this to America, where you can get fired rather easily. A company knows they can just can you if they need to cut some losses. The unions are also much weaker here (in general), so wages aren't being pushed up in the same way that they are in Europe. So, wages drop, but it's easier to get a job.

Of course I could start discussing the differences between the nordic and continental market economies and why the nordic countries would not respond in a similiar manner as places like France and Germany... but the study was probably focused on continental Europe and I don't need to be writing an essay right now. This is just a 1 am procrastination effort. I believe I have succeeded.

If I do this consistently, I think I should get an A+ for being a good student. Or a cookie or something.

Gustav Kjellsson said...

I think Matt doing a good job, but there are additional possible explanations. First: In many European countries there is also less incentives to get a new job due to the higher level of unemployment insurance/reimbursement.

Second; the labour market in the U.S. is arguably also more flexible because the homogenous culture across the continent and especially due to the absence of a linguistic barrier to the mobility of labour. In other words, Americans are more prone to move.

Trade and Jobs
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