7. Distributional effects of openness: Does globalization cause inequality? Flashcards
What are the positive implications of trade as one of the form of openness?
(Specifically H.O model–> what happens to the factor price of the abundant factor of production as the economy moves to the free trade?
Trade as one form of openness leads to overall welfare gains for countries, but it has strong distributional effects. Using standard trade models, we expect that globalization would boost the wages of low-educated workers in developing countries. Why? According to the Stolper Samuelson Theorem, world markets offer higher relative price for the abundant good than autarky, and thus the real factor price of this good increases as well. Why does it happen? As the economy moves to the world market, the demand for a good, intensively produced using an abundant factor of production, increases, since the range of consumers increases (both domestic an foreign consumers want to consume that good). In this way, world relative price of that good is pushed up and so is the factor price of an abundant factor of production.
Example: Using standard trade models, we expect that globalization would boost the wages of low-educated workers in developing countries. Low-educated labor is the relatively abundant factor in those countries ⇒ we expect globalization to enhance development (i.e demand for a low-educated labor should increase as developing countries move to the world market).
According to the Stolper-Samuelson theorem: An increase in the relative price of a good (due to transition to the world market) increases the returns (factor prices) to the factors used intensively in the production of this goods, and reduce the factor price of the factor which isn’t used intensively. Although gains from trade hold in aggregate, within-country inequality has increased in both developing and developed countries.
What is trade today according to “Grossman and Rossi-Hansberg: Trading Tasks”?
The nature of trade has changed dramatically over the last two centuries. Whereas trade historically has involved an exchange of complete goods, today it increasingly entails (подразумевает) DIFFERENT COUNTRIES ADDING VALUE TO GLOBAL SUPPLY CHAINS.
What is “Global Value Chains”?
The concepts of a global value chain (GVC) and GLOBAL SUPPLY CHAIN refer to the PEOPLE, ROLES AND ACTIVITIES INVOLVED IN THE PRODUCTION OF GOODS AND SERVICES, AND THEIR SUPPLY AND DISTRIBUTION, and post-sales activities when those activities must be coordinated across geographies.
The concept of a VALUE CHAIN has been used to analyze INTERNATIONAL TRADE in global value chains and comprises “the full range of ACTIVITIES THAT ARE REQUIRED TO BRING A PRODUCT FROM ITS CONCEPTION, through its design, its sourced raw materials and intermediate inputs, its marketing, its DISTRIBUTION AND ITS SUPPORT TO THE FINAL CONSUMER.
Whereas the concept of a SUPPLY CHAIN focuses on CONVEYANCE OF MATERIALS AND PRODUCTS BETWEEN LOCATIONS, often including change of ownership of those materials and products.
The existence of a GLOVAL VALUE CHAIN (i.e. where DIFFERENT STAGES IN THE PRODUCTION and consumption of materials and products of value TAKE PLACE IN DIFFERENT PARTS OF THE WORLD) implies a global supply chain engaged in the MOVEMENT OF THOSE MATERIALS AND PRODUCTS ON A GLOBAL BASIS.
The GVC revolution and its effects?
INTERNATIONAL PRODUCTION, TRADE AND INVESTMENT ARE INCREASINGLY ORGANISED WITHIN SO-CALLED GLOBAL VALUE CHAINS (GVCs) where the different stages of the production process are located across different countries.
GLOBALISATION motivates companies to RESTRUCTURE their OPERATIONS INTERNATIONALLY through OUTSOURCING AND OFFSHORING OF ACTIVITIES.
Firms try to OPTIMISE their PRODUCTION PROCESSES BY LOCATING THE VARIOUS STAGES OF PRODUCTION ACROSS DIFFERENTS COUNTRIES.
The past decades have witnessed a strong TREND towards the INTERNATIONAL DISPERSION OF VALUE CHAIN ACTIVITIES such as design, production, marketing, distribution, etc.
This EMERGENCE OF GVCs challenges conventional wisdom on how we look at economic globalisation and in particular, the policies that we develop around it.
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Other effects of GVC on firms:
- GVC imply that PRODUCTION IS FRAGMENTED ACROSS COUNTRIES, leading to INCREASED CONNECTIONS BETWEEN FIRMS ALL OVER THE WORLD.
What are BACKWARD AND FORWARD LINKAGES?
BACKWARD LINKAGES characterize the relationship of an industry or institution with its supply chain. In Industry has significant backward linkages when its production of output requires substantial Intermediate Inputs from many other industries within the same study area. That is country’s exports embody value added previously imported from abroad.
Forward linkages relates to the interconnection of an Industry to other Industries to which it sells its Outputs. An Industry has significant forward linkages when a substantial amount of its Output is used by other Industries as Intermediate Inputs to their production: a country’s exports are embodied in the importing country’s exports to third countries.
Trade in tasks by Grossman and Rossi-Hansberg (2008): Assumptions and main research question.
Assumptions:
-> Allowing remote performance only of the tasks undertaken by low-skilled workers, while permitting such tasks to be conducted offshore in all industries.
- > A parameter b that describes the prospects for offshoring. Reductions in this parameter ( describe occurrences that lead to the reduction of the cost of offshoring) represent improvements in communication and transportation technology that reduce proportionally the cost of offshoring all tasks performed by low-skilled labor.
- > Research question: how do improvements in the opportunities (reduction in b) for offshoring AFFECT THE WAGES AND WELLBEING OF DIFFERENT TYPES OF LABOR?
Trade in tasks by Grossman and Rossi-Hansberg (2008): What effects does a fall in the cost of offshoring low-skill tasks cause?
In general, fall in the cost of separating (offshoring) low-skill tasks induces a productivity effect, a relative-price effect, and a labor-supply effect on low-skill wages.
1) THE PRODUCTIVITY EFFECT:
derives from the COST SAVINGS that FIRMS ENJOY when prospects for offshoring improve. F This effect—which is present whenever the difficulty of offshoring varies by task, and task trade is already taking place—WORKS TO THE BENEFIT OF LOW-SKILLED LABOR.
Fall in the cost of offshoring has a TECHNOLOGY-ENHANCING EFFECT ON THE LOW-SKILLED LABOR–> MORE OUTPUT IS PRODUCED.
2) RELATIVE PRICE EFFECT:
occurs when a fall in offshoring costs ALTERS A COUNTRY’S TERMS OF TRADE (EXPORTS BECOME CHEAPER).
The relative price of good moves in the opposite direction to the change in its relative world supply (due to INCREASED PRODUCTIVITY, SUPPLY INCREASES, RELATIVE PRICE DECREASES.
Such price movements are mirrored by movements in relative cost and have implications for wages (WAGES WILL BE LOWER) that are familiar from traditional trade theories.
3) LABOR-SUPPLY EFFECT:
operates in environments in which FACTOR PRICES RESPOND TO FACTOR SUPPLIES AT GIVEN RELATIVE PRICES. This effect derives from the reabsorption of workers who formerly performed tasks that are now carried out abroad –> EFFECTIVE INCREASE IN LOW-SKILLED LABOR DUE TO THE PRODUCTIVITY EFFECT- FALL IN THE RELATIVE WAGE OF LOW-SKILLED LABOR
Trade in tasks by Grossman and Rossi Hansberg (2008):
Model set ups to analyze the PRODUCTIVITY EFFECT, RELATIVE PRICE EFFECT and LABOR SUPPLY EFFECT and the respective results
PRODUCTIVITY EFFECT:
ASSUMPTIONS:
1) SMOEC
2) 2 GOODS, 2 FACTORS OF PRODUCTION
3) TERMS OF TRADE ARE FIXED
4) WAGES DON’T RESPOND TO FACTOR SUPPLIES
- —-> this leaves the PRODUCTIVITY EFFECT as the ONLY REMAINING FORCE
RESULTS: Authors show that IMPROVEMENTS IN THE TECHNOLOGY FOR OFFSHORIN LOW-SKILLED LABOR act like LABOR-AUGMENTING TECHNOLOGICAL PROGRESS and that,
perhaps SURPRISINGLY, THE REAL WAGE FOR LOW-SKILLED LABOT MUST RISE.
We contrast the effect of offshoring and immigration and argue that the latter will not result in a productivity effect.
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RELATIVE PRICE and LABOR-SUPPLY EFFECT
ASSUMPTIONS:
1) LARGE TWO-SECTOR ECONOMY
2) LATER AN ECONOMY IN WHICH THE HIGH-WAGE COUNTRY SPECIALIZES IN THE PRODUCTION OF A SINGLE GOOD.
RESULTS:
Authors show that the PRODUCTIVITY EFFECT IS SMALL WHEN THE RANGE OF OFFSHORED TASKS IS SMALL.
But it can OUTWEIGH OTHER EFFECTS when the VOLUME OF TASK TRADE IS LARGE.
In Section III, we extend the model to include the possibility of offshoring tasks that require high-skilled labor. Here we identify another productivity effect, this one favoring high-skill workers.
Conclusion, generally offshoring acts technology-enhancing
Theory of trade in tasks by Grossman and Rossi-Hansberg (2008):
What are the contributions of this paper?
First, it provides a SIMPLE AND TRACTANLE MODEL OF OFFSHORING that can be used for many purposes.
By modeling the PRODUCTION PROCESS AS A CONTINUUM OF TASKS, we are able to provide a NOVEL DECOMPOSITION OF THE EFFECTS OF A FALL IN OFFSHORING COSTS.
The second contribution is to UNCOVER THE PRODUCTIVITY EFFECT!!! and to show that this effect is ANALOGOUS TO FACTOR-AUGMENTING TECHNOLOGICAL CHANGE (FOR LOW-SKILLED LABOR in this case).
We characterize this EFFECT fully and show that it typically GROWS WITH THE VOLUME OF OFFSHORING.
Theory of trade in tasks by Grossman and Rossi-Hansberg (2008): The model (summary of this chapter in the article)
–>Conceptualization the production process in terms of tasks.
–> Tasks can be performed by workers who have relatively little education or training (“L-tasks” ), while others must be performed by workers who have greater skills ( “H-tasks.”)
–> Firms in the home country can produce two goods, X and Y, with constant returns to scale.
–> The production of a unit of either good involves a continuum of L-tasks, a continuum of H-tasks.
–> If a production technology admits no substitution between factors or tasks, then each task must be performed at a fixed intensity in order to produce a unit of output.
That is, each of the unit measures of L-tasks must be performed exactly “once” in order to produce a unit of output of good j, and similarly for each of the H-tasks and each of any other types of tasks that are part of the production process.
–> Firms can undertake tasks at home or abroad. Tasks can be performed offshore either within or beyond the boundaries of the firm.
–> We assume that a firm needs the same amount of a foreign factor whether it performs a given activity in a foreign subsidiary (Tochterunternehmen) or it outsources the activity to a foreign supplier. In either case, the factor requirement is dictated by the nature of the task and by the firm’s production technology.
–> Some tasks are more difficult to offshore than others. The cost of offshoring a task may reflect how difficult it is to describe using rules-based logic, how important it is that the task be delivered personally, how difficult it is to transmit or transport
the output of the activity etc.
–> Author sharply focus on the offshoring of tasks performed by low-skilled labor by assuming that it is prohibitively costly to separate all other tasks from the headquarters.
–> Each sector j needs aLj units of low-educated labor for every task i that is performed, where aLj depends on factor prices (like in H.O model)!!!!! –> input coefficients aren’t exogenously given like in Ricardo model.
–> If the task is offshored, then βt(i)aLj units of low-educated labor must be employed abroad (β is a shift parameter, used to study improvements in the technology for offshoring.). Order tasks such that t(i) is increasing.
–> Issue of factor and task substitution: The production technology may allow a firm to vary the intensities of L-tasks and H-tasks (and any other tasks) that it performs to produce a unit of output. For example, a firm might conduct the set of assembly (L) tasks repeatedly and oversight (H) tasks rarely, and thereby accept a relatively low average productivity of low-skilled labor, or it might conserve on assembly tasks by monitoring the low-skilled workers more intensively.
–> The intensity of task performance offshore is captured in our framework by the amount of the domestic factor that is used to perform a typical task at home.
When substitution between L-tasks and H-tasks (and any others) is possible, aLj and aHj become choice variables for the firms, who select these variables to minimize cost subject to a constraint that the chosen combination of task intensities are sufficient to yield a unit of output (think about H.O model)
A firm that chooses aLj for the intensity of its L-tasks must employ aLj βti units of foreign labor to perform task i offshore.
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EQUILIBRIUM WITH TRADE GOODS AND TASKS:
Feenstra Offshoring in the Global Economy: Introduction and the structure of the paper
We are arguably now in a second GOLDEN AGE golden age of trade, which like the first, has relied on declines in costs of transportation, such as the container ship, as well as communication, with developing countries leapfrogging to fiber optic cable and cellular telephone services at costs lower than in advanced economies.
These costs have now fallen so much that it is possible to break apart the production process, with various stages occurring in different countries (foreign “outsourcing,” or simply “offshoring”).
This new feature of globalization means that the spread of technology is even more rapid than in the time of Heckscher and Ohlin.
The ability to utilize labor in other countries suggests that domestic resources are no longer the binding constraint on international trade. The speed with which instructions and designs can be transmitted overseas further suggests that these activities need not occur in the same country as production, but that FRIMS CAN TRULY SEARCH THE GLOBAL ECONOMY ON ORDER TO MINIMIZE COSTS.
Is the Heckscher-Ohlin (HO) model – in all its manifestations –sufficiently rich to guide our understanding of offshoring, or does it leave out some critical elements?
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STRUCTURE OF THE STUDY:
1) Focus on the issue of whether TECHNOLOGY AND TRADE EXPLAINED THE CHANGE IN WAGES IN THE U.S IN 1980’S.
Interestingly, neither Leamer nor Krugman arrived at a satisfactory explanation for the change in wages that occurred in the 1980s.
During this decade there was a pronounced shift in the pattern of wages earned by workers in the United States and other countries: RELATIVE WAGES SHIFTED TOWARDS MORE-SKILLED WORKERS, so that a “WAGE GA” developed BETWEEN those with HIGHER AND LOWER SKILLS.
The Stolper-Samuelson Theorem would lead us to expect that the movement in world prices could have such an impact on factor prices, but Leamer (1998) rejects that explanation for the 1980s.
Alternatively, factor-content calculations might explain the fall in low-skilled wages as due to increased imports in the U.S., especially by developing countries, but Krugman also finds that this explanation is insufficient.
However, by using H.O STRUCTURE structure WITH A CONTINUUM OF GOODS, the patterns of WAGE CHANGES in the 1980s are entirely CONSISTENT WITH INTERNATIONAL TRADE:
particularly CHANGES IN PRICES CONSISTENT WITH CHANGES IN WAGES.
But the story for the 1990s is quite different. There has continued to be an INCREASE IN THE RELATIVE WAGE OF HIGHLY SKILLED WORKERS in the U.S., but the RELATIVE EMPLOYMENT OF THESE WORKERS HAS FALLEN. (change in the factor endowment: high-skilled labour stopped being an abundant factor of production in the U.S) —> OFFSHORING MIGHT BE THE REASON!
That finding is strongly suggestive of the OFFSHORING of service activities, whereby the more routine service activities are sent overseas.
To explain this new form of offshoring, Feenstra will appeal to the recent work of Gene Grossman and Esteban Rossi-Hansberg (2008a), emphasizing what they call “trade in tasks.” They present their MODEL OF OFFSHORING AS A NEW PARADIGM.
Feenstra Offshoring in the Global Economy: Effects of offshoring on the real wages.
REGARDLESS of how offshoring affects the RELATIVE WAGES, it is entirely possible that the REAL WAGES OF ALL WORKERS WILL IMPROVE.
The reason for this improvement is that OFFSHORING LEADS TO A PRODUCTIVITY INCREASE FOR FIRMS, which will LOWER THE PRICES FOR FINAL GOODS.
It is certainly POSSIBLE THAT THE DROP IN PRICES EXCEEDS THE FALL IN WAGE OF EITHER TYPE, so that real wages improve in theory.
The two-step procedure allows us to ISOLATE THE IMPACT OF OFFSHORING AND THE INCREASED USE OF HIGH-TECH CAPITAL ON THE REAL WAGE, directly from the regression coefficients in the second stage.
For nonproduction workers (highly skilled labor), we find that their real wages rose between 1 and 2% over the entire decade due to offshoring (i.e DUE TO AN IMPROVEMENT IN TECHNOLOGY OF THE PRODUCTION, THE PRICES WENT DOWM MORE STRONGLY THAN THE WAGES DID. So, although wages decreases, they were still higher than the prices) and closer to 3% over the decade due to the increased use of high-technology capital.
For production workers, we cannot identify any significant impact of offshoring on their real wage, and a very slight positive impact of the increased use of high-tech capital.
Feenstra Offshoring in the Global Economy: On the study of Grossman and Rossi-Hansberg (2008a).
These authors prefer to think of “tasks” performed by high-skilled or low-skilled labor, rather than “activities” that combine factors.
They present a simple two-sector model of the economy, where in each sector and for each factor there are a continuum of tasks.
Any of these tasks could be offshored, and if that occurs, then the home firm will use its own technology abroad.
While Grossman and Rossi-Hansberg do not specify whether the offshoring is done inside or outside of the firm, the fact that the home technology is transferred abroad suggests a multinational relationship between the firms.
Feenstra Offshoring in the Global Economy: Trade in tasks model + offshoring equilibrium conditions
Focusing first on low-skilled labor, offshoring one unit of task i means that βt(i) units of low-skilled labor must be employed abroad. The tasks are ordered so that the function t(i) is increasing in particular task i, as shown in Figure 1.10.
The amount βt(i) indicates the “extra” labor that must be employed abroad to achieve the same outcome as one unit of labor at home.
Grossman and Rossi-Hansberg in further assume that the offshoring costs βt(i) are identical in the two sectors.
Then the equilibrium amount of offshoring is determined where the costs of performing the borderline task (I) abroad, or w*βt(I), equals its cost at home.
w*βt(I) = w
βt(I)=w/w* ->
the offshoring cost=relative wages of labor performing task I at home and abroad
Feenstra Offshoring in the Global Economy: All equilibrium conditions of the model for trade in tasks
This equilibrium condition for offshoring needs to be supplemented with the zero-profit and full-employment conditions.
1) EQUILIBRIUM OFFSHORING:
amount of offshoring is determined where the costs of performing the borderline task (I) abroad, or w*βt(I), equals its cost at home.
w*βt(I) = w
2) ZERO-PROFIT CONDITION:
The zero-profit conditions are that the SUM OF COSTS OF DOMESTIC AND OFFSHORED LABOR FOR EACUH UNIT OF PRODUCTION EQUAL THE PRICE:
pj =wLaLj(1−I)+wLaLj INTEGRAL βt(i)di+wHaHj
where wH the wage for high-educated labor (which for the moment is not offshored)
Substituting for wL∗ (wage for the offshored low-skilled labor force abroad)
p j = waLjΩ(I) + saHj ,
Ω(I) =(1-I)+ INTEGRAL t(i)di/ t(I) < 1.
–> Notice that in this zero-profit condition, OFFSHORING ACTS LIKE A LOW-SKILLED LABOR-SAVING TECHNOLOGICAL INNOVATION OR ANOTHER FORM OF SKILL-BIASED TECHNOLOGICAL CHANGE.
We can therefore graph two zero-profit conditions to determine the factor prices, as at point A in Figure 1.11, recognizing that the ISOCOST CURVES DEPEND ON THE AMOUNT OF OFFSHORING.
