Manufacturing Employment Cycle

The paper demonstrates that two relatively unknown features of the employment cycle in U.S. manufacturing industries can provide a clue to understanding the role of sectorial shocks in the evolution of aggregate employment. First, interindustry wage differentials rise in expansions and fall in contractions. Second, periods of increasing aggregate employment are associated with relatively good price and productivity shocks to capital-intensive sectors. The paper presents a simple general-equilibrium model where bargaining at the industry level and rents due to sector-specific capital generate a wage structure with higher wages in capital-intensive sectors but where the response of wages to sector-specific shocks is greater in labor intensive sectors. Empirical evidence is presented to support such implications of the model. The asymmetry of wage adjustments imply that aggregate employment responds more to shocks in capital-intensive industries and that procyclical wage differentials can only result from asymmetric disturbances.Cyclical unemployment, interindustry wage differentials, sector-specific wages

FDI and Labor Markets in General Equilibrium

International wage differences -driven by international technology or factor endowment differences-encourage the flow of Foreign Direct Investment from high- to low-wage countries. However, the access of high-technology firms may drive domestic wages up, dampening the incentives for FDI flows. A general equilibrium model that emphasizes the joint determination of FDI flows and labor market outcomes yield several conclusions. First, an equilibrium with positive FDI inflows and wages above autarky levels is more likely in large labor-abundant technology-backward countries or when the fixed cost of foreign investment is low. Second, the conditions that depress autarky wages -technology differences and labor abundance- are those than enhance the equilibrium wage rate when FDI takes place. Third, FDI rises the relative cost of labor in the host economy, shifting the domestic production structure toward a more capital-intensive mix. Finally, the sectoral distribution of FDI flows does not depend upon differences in factor intensities, and it is solely determined by sectoral differences in the fixed cost of foreign investment.Foreign direct investment, labor markets, international technology differences

Latin America in the Era of Glabalization - Introduction

Trade, unit values, globalization, technology differences, geography, wage inequality

On the Costs and Effectiveness of Tarjeting State Employment: Germany in the 1990s and China in the 2000s

The German unification process imposed a significant price-cost squeeze on eastern firms. Important technology differences between the East and the West generated high pressures on the competitive position of eastern manufacturing firms when product and factor markets integration took place. In order to avoid mayor employment and output costs, the government subsidized eastern firms. A similar process is expected in China after accession into the WTO. The restrictions to foreign firms to access domestic markets have to be lifted, and hence significant cost pressures on native, specially state-owned enterprises, are expected. The projected employment shift from native to foreign firms suggests that the Chinese government may decide to slow down the transition process, as Germany did. This paper estimates the fiscal costs of artificially targeting state employment through product price subsidies rather than allowing factor reallocation. The subsidy needed to increase East Germany's manufacturing employment by 1% was around 0.9% of value-added prices, compared to a 1.2% subsidy if China targets state employment or 18.7% if China targets native employment. These numbers imply that the annual cost per worker targeted in Germany more than 13 times the cost per worker in China.Integration, fiscal transfers, technology gap, Germany, China

Technology Differences and Capital Flows

The one-to-one mapping between cross-country differences in capital returns and the direction of international capital flows is broken in a multisector world where international factor price differences are driven by technology differences. A technology-backward or low-return-to-capital country will face capital inflows or outflows after financial integration depending on whether non-tradable demand is bossted or notTEchnology Differences, Capital Flows, International Factor Price Differences

A Cross-Country Estimation of the Elasticity of Substitution between Labor and Capital in Manufacturing Industries

This paper presents a simple methodology to estimate the elasticity of substitution between labor and capital for firms operating in perfectly competitive markets with CRS production functions. It is applied in a cross-country sample to 28 3-digit ISIC manufacturing industries. The econometric procedure relies on measures of sectorial capital stock, that are estimated for a sample of more than 30 countries. Unlike older studies, the estimates are consistent with hicks-neutral cross-country technology differences. The results reveal that in most industries the elasticity of substitution is smaller than one, rejecting the null hypothesis of Cobb-Douglas production functions. The paper provides then an estimation of ¾LK at a level of aggregation extremely useful for research in the international trade literature.

FDI Liberalization as a Source of Comparative Advantage in China

Three features of China?s trade patterns suggest that elements beyond factor abundance explain its export performance. The high penetration in world markets of labour-intensive products has been accompanied by: (i) a high share in exports of productivity-advanced foreign-owned enterprises (FIEs), (ii) a high penetration of FIEs in labour-intensive sectors, and (iii) a relative high sophistication of China?s exports. We show that FDI liberalization endogenously introduces Ricardian features to an otherwise standard endowment-based trade model, strengthening China?s natural comparative advantage in labour-intensive products. We discuss how capital accumulation, productivity growth, rural-urban migration, incentives for foreign investment and distortions in financial markets affect this bias. We conclude that policies enhancing domestic firms? production, through productivity growth or capital market distortions, implicitly support the capital-intensive sector. In contrast, policies that encourage FDI, like greater access to China?s capital and labour market would shift China?s comparative advantage even further towards labour-intensive products.comparative advantage, FDI liberalization, labour markets, China