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

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

Latin America in the Era of Glabalization - Introduction

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

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 factor markets with constant-elasticity-of-substitution technologies. It is applied to a cross-countElasticity of substitution, international technology differences

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

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.

Vertical and Horizontal Dimensions of Trade Liberalization

FDI introduces competition between foreign and domestic firms at the factor market level. If the latter are technology backward, cost pressures render them uncompetitive, and absolute advantage determine the pattern of foreign and domestic firms’ production. To compensate for technology deficiencies, countries introduce distortions in product and factor markets. Trade liberalization, i.e., the removal of these distortions, have important implications for production and employment patterns, wages and capital flows. I provide evidence that China’s policies to protect domestic -specially state-owned- firms match the model’s prediction on the structure of interventions.Trade integration, tariffs, capital subsidies, FDI, technology transfers, China

Tariffs, Technology and Global Integration

In the last two decades tariffs around the globe have fallen significantly. However, less well known are their changes in the sectorial structure of protection rates. Between 1988 and 1998, relative tariffs have increased in capital-intensive sectors, and this shift is specially strong in low wage countries. These changes in tariff structures reflect the response of governments to increasing integration in product and capital markets in the presence of international technology differences. Integration in factor markets revives the concept of absolute advantage, and countries adjust their tariff structure in order to compensate for technology differences and cost pressures in order to keep a diversified production structure. As a corollary, wage differences increase both within and between countries.Globalization, international technology differences, tariffs

Labor Market Implications of Limited Integration

Globalization, in its multiple interpretations, is seen by many people as a great possibility of improving living standards in developing countries. Trade and financial integration can encourage competition, technology transfers and specialization according to comparative advantage principles. Indeed, after decades of protectionism with very poor results, many countries have actively opened their economies to global competition in search for such great opportunities. Although in many cases the results are encouraging, for a vast group of countries the last two or three decades have been years of turmoil, stagnation and financial crises. These complications have enhanced the criticisms across the world to the process of global integration (Stiglitz (2002)). This paper argues that many of these costs follow from governments’ policies aimed to limit or restrict the scope of integration of countries with the rest of the world. In the presence of international technology differences, limited or restricted integration may generate wage and employment adjustments that could be avoided if countries were to embrace globalization without restrictions. I present a very stylized model where financial integration leads to specialization. In this setting, countries that avoid specialization through trade distortions have much greater downward pressures on wages than countries that do specialize. Moreover, if non-tradable prices are downward rigid and there are some limits to the current account deficits countries can run, employment costs may arise. The model shows that these costs may be greater with a limited globalization strategy than with a laissez-faire policy.Globalization, wages, employment, technology differences, capital flows