A survey of the relevant literature finds that no really satisfactory answer is yet available on the issue of how important foreign trade really is for labour market developments. European studies have (with some exceptions) arrived at the conclusion that foreign trade has little impact on wages; yet actual findings were very much dependent on the methods used and periods observed. At the current state of discussions, no rule of thumb of the sort "foreign trade has increased wage differentials by x percent" can be given. Similarly, no secure findings can be obtained for unemployment and job rates. Available results of empirical studies need to be considered in the light of the dispute between foreign trade economists and labour economists over the proper method to measure foreign trade effects on wages. This dispute revolves around three major issues: 1. Which reference model should be used for analysis: a labour market model based on partial equilibrium analysis or a general equilibrium model based on foreign trade theory? The latter describes long-term relationships and assumes free intersectoral mobility of the labour force. Import pressure in one sector causes redundant labour to move into another sector. Any change in the labour supply is thus fully absorbed by output shifts between sectors. Wages remain unchanged for as long as such output shifts do not cause any change in domestic prices for the goods, such as would be the case in a small open economy (which acts as a pure price taker on the global market). 2. Does foreign trade impact on domestic wages through the trade volume or through price shifts? While labour market approaches usually start out from import and export volumes, such an assumption is not valid from the point of view of the Heckscher-Ohlin foreign trade theory. Even when import and export volumes are very small, they may critically affect the labour market if firms scale down their prices to the global market price in consequence of trade liberalisation. 3. How can results be checked for other possible factors influencing the wage differential between high- and low-skilled workers (technological progress, shortcoming in the education system, etc.)? Available studies in Austria are based on the labour market theory and have arrived on – occasionally – highly divergent results, which are summarised in the survey. No empirical studies based on foreign trade theory have so far been carried out.
Außenhandel und Löhne. Ein Literaturüberblick; Foreign Trade and Wages
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