Recent public debate over trade policy in the OECD countries has been focused, in large part, on the impact of trade on wages and employment. In many circles, in fact, employment effects have dominated national income effects as a measure of welfare and policy desirability. In Discussion Paper No. 1069, Research Fellow Joseph Francois examines the implications of relatively rapid labour force growth in one region for wages, employment, and the pattern of production in other regions. These issues are first explored in a stylized dual model incorporating features of both standard factor-based trade models and models of two-way trade and returns to specialisation. Sufficient conditions for positive trade linkages between labour force growth in one region and real wage and employment erosion in another are derived. These conditions are then examined in the context of non-OECD labour force growth, through a multi-region, multi-sector numerical model of the world economy.

One consistent pattern that emerges from the simulations is the relatively strong pressure for a continued shift in the OECD economies out of manufacturing sectors and into services. Even with a wide range of wage effects for the OECD countries, the simulation results point almost consistently, under constant returns, to a pattern of eroding wages in the developing world, particularly in relation to the OECD. Thus, one medium term implication of this analysis is the potential for a widening gap in per capita incomes between the rich and poor countries, driven by population pressures. This in turn suggests strengthened incentives for economic migration. These pressures are greatly moderated when scale economies are realized. This moderation appears to hinge, at least in part, on continued market access to the OECD countries, however.

Labour Force Growth, Trade, and Employment
Joseph F Francois