Question

How does international trade and the global workface affect wages?

Answer 1

According to world economic forum: "  Wage inequality has increased in the past three decades, affecting both developed and developing countries alike. During the same period, international trade flows have grown significantly, with trade in intermediate goods and global production chains taking an increasingly predominant role. Put together, these developments have led researchers to reconsider trade integration as one important factor behind the rise in wage inequality.

Protectionism certainly saves jobs in the specific industry being protected but, for two reasons, it costs jobs in other unprotected industries. First, if consumers are paying higher prices to the protected industry, they inevitably have less money to spend on goods from other industries, and so jobs are lost in those other industries. Second, if the protected product is sold to other firms, so that other firms must now pay a higher price for a key input, then those firms will lose sales to foreign producers who do not need to pay the higher price. Lost sales translate into lost jobs. The hidden opportunity cost of using protectionism to save jobs in one industry is jobs sacrificed in other industries. This is why the United States International Trade Commission, in its study of barriers to trade, predicts that reducing trade barriers would not lead to an overall loss of jobs. Protectionism reshuffles jobs from industries without import protections to industries that are protected from imports, but it does not create more jobs.

Economists have long recognized that trade would lead to a division of labour advantageous to everybody involved. Indeed, by reshuffling resources in accordance with the principles of comparative advantage, they can be used more appropriately and effectively for production, thus creating the so-called gains from trade. Highly productive producers will be able to expand as they start selling their goods or services abroad. Producers and consumers will be able to take advantage of cheaper imports and of a larger product and quality choice. The latter, however, implies that some domestic production will be replaced by imports.

The growing role of trade and foreign direct investment (FDI) flows in the global economy has generated increasing interest among policy-makers, the media and the general public in its impact on employment and incomes across the world. In mainstream economic theory it is presumed that these developments will, in spite of possible problems of adjustment inherent in the process, eventually yield net benefits in terms of employment and incomes in the global economy. In contrast, discussions of the issue in the media often focus on negative effects such as job losses resulting from increased import competition and the displacement of local firms by FDI; the relocation of jobs from high to low-wage economies, and claims that increasing globalization has triggered a “race to the bottom” in terms of wages and the quality of employment.