NBER Reporter: Summer 2001

Labor in the Global Economy

An NBER-Universities Research Conference on "Labor in the Global Economy" took place in Cambridge on May 11 and 12. Labor Studies Program Director Richard Freeman, NBER and Harvard, was the organizer. Eli Berman, NBER and Boston University, and Morris M. Kleiner, NBER and University of Minnesota, were moderators. The program was:

Andrew B. Bernard, NBER and Dartmouth College, J. Bradford Jensen, University of Maryland, and Peter K. Schott, Yale University, "Factor Price Equality and the Economies of the United States" (NBER Working Paper No. 8068)

Discussant: Eli Berman

Dae-Il Kim, Seoul National University, and Peter Mieszkowski, Rice University, "The Effects of International Trade on Wage Inequality in the United States"

Discussants: Bernardo S. Blum, University of California, Los Angeles, and Eli Berman

Linda Goldberg and Joseph Tracy, Federal Reserve Bank of New York, "Exchange Rates and Wages" (NBER Working Paper No. 8137)

Discussant: Lori Kletzer, University of California, Santa Cruz

James P. Smith, Duncan Thomas, Elizabeth Frankenberg, Kathleen Beagle, and Graciela Teruel, RAND,

"Wages, Employment, and Economic Shocks: Evidence from Indonesia"

Discussants: David E. Bloom, NBER and Harvard University, and John R. Harris, Boston University

Belton M. Fleisher and Xiaojun Wang, Ohio State University, "Skill Differentials, Returns to Schooling, and Market Segmentation in a Transition Economy: The Case of Mainland China"

Discussant: Gary H. Jefferson, Brandeis University

Chang-Tai Hsieh, Princeton University, and Keong T. Woo, KPMG "The Impact of Outsourcing to China on Hong Kong's Labor Market"

Discussant: Jeffrey H. Bergstrand, University of Notre Dame

Ju-Ho Lee, Korea Development Institute; Young-Kye Moh, Ohio State University; and Dae-Il Kim, Seoul National University "Do Unions Inhibit Labor Flexibility? Lessons from Korea"

Discussant: David L. Lindauer, Wellesley College

Andrew M. Warner, Harvard University, "International Wage Determination and Globalization"

Discussants: Malcolm Cohen, University of Michigan, and Peter Gottschalk, Boston College

Gary Fields, Paul Cichello, David Newhouse, and Samuel Frieje, Cornell University; and Marta Menendez, DELTA, "A Four Country Story" Household Income Dynamics in Indonesia, South Africa, Spain, and Venezuela"

Discussants: Peter Gottschalk and John R. Harris

Morris M. Kleiner, and Hwikwon Ham, University of Minnesota, "Do Industrial Relations Institutions Affect Economic Efficiency?: International and U.S. State-level Evidence"

Discussant: Takao Kato, Colgate University

Bernard, Jensen, and Schott consider the role of international trade in shaping the product mix and relative wages for regions within the United States. They ask whether all the regions in the United States face the same relative factor prices. Using data from 1972-92, they conclude that all regions do not face the same relative factor prices; rather, there are at least three distinct factor price cones. Sorting regions into cones with similar relative factor prices, the authors find that industry mix varies systematically across the groups. Regions that switch cones over time have more churning of industries.

Kim and Mieszkowski develop several simple general equilibrium models to analyze the effects of increased international trade on the growth of income inequality that occurred in the United States during the 1970s and 1980s. They conclude that the expansion of trade has decreased the real wage of unskilled labor by between 1 and 3 percent, a relatively small amount. To obtain this estimate, they develop a new measure of skill based on information found in the Directory of Occupational Titles. This skill index and data from the Occupational Employment Survey and Input-Output Information are used to calculate three factor shares for two tradable and two non-tradeable sectors.

Understanding the effects of exchange rate fluctuations across the population is important for increasingly globalized economies. Previous studies using industry aggregate data found that industry wages are significantly more responsive than industry employment to exchange rate changes. Goldberg and Tracy offer an explanation for this paradoxical finding. Using Current Population Survey data for 1976 through 1998, they show that the main mechanism for exchange rate effects on wages occurs through job turnover; this has strong consequences for the wages of workers undergoing such job transitions. By contrast, workers who remain with the same employer experience little if any wage impacts from exchange rate shocks. In addition, the least educated workers - who also have the most frequent job changes - shoulder the largest adjustments to exchange rates.

After more than a quarter century of sustained economic growth, Indonesia was struck in the late 1990s by a large and unanticipated crisis. Real GDP declined by about 12 percent in 1998. Using 13 years of annual labor force data in conjunction with two waves of a household panel, the Indonesia Family Life Survey (IFLS), Smith and his co-authors examine the impact of the crisis on labor market outcomes. Aggregate employment has remained remarkably robust, although there has been significant switching within sectors. The drama of the crisis lies in real hourly earnings, which collapsed by around 40 percent in one year for urban workers, both male and female, in the market sector or self-employed. Declines of the same magnitude occurred for females in the rural sector and rural males working for a wage. In stark contrast, real hourly earnings of self-employed males in rural areas remained essentially stable. Given that these workers account for about one quarter of the male work force in Indonesia, any conclusions about the effects of the crisis that focus only on the market wage sector substantially overstate the magnitude of the crisis. The authors estimate that declines in real household incomes are about half the magnitude of the declines in individual hourly earnings, indicating that households have adopted an array of strategies to mitigate the effects of the crisis.

Fleisher and Wang address the puzzle of persistent low private returns to schooling in China's transition to a market economy. They find that both urban and rural enterprises overpay production workers relative to a profit-maximizing standard and that underpayment is far more extreme for skilled workers. This relatively large "exploitation" of skilled workers explains, in a proximate sense, the low private return to schooling. The circumstances of factor payments in rural enterprises are further complicated by the existence of unexploited scale economies which preclude paying all inputs the value of their marginal products. Both production and technical/managerial workers in rural collectives act as de facto residual claimants; that is, the gap between their production value and their pay is related positively to estimated economies of scale. The authors attribute the existence of unexploited scale economies and the residual underpayment of labor to segmented product and factor markets and to constraints on funds that can be invested.

After decades of autarky, China opened its economy to foreign investors in the late 1970s and early 1980s. Hsieh and Woo examine the impact of the resulting outsourcing of production from Hong Kong to China on Hong Kong's labor market. They show that the relative demand for skilled workers in Hong Kong increased sharply at exactly the same time that outsourcing to China began to increase in the early 1980s. Rapid skill upgrading within detailed industries in the manufacturing sector accounts for most of the growth in the relative demand for skilled workers, but plays a much less important role in the non-manufacturing sector. Using several measures of outsourcing to China, the authors show that the rate of skill upgrading has been greater in industries with a greater degree of outsourcing to China. These measures of outsourcing account for 45 to 60 percent of the shift in the relative demand for skilled workers.

Lee, Moh, and Kim examine whether and to what extent unions inhibit labor flexibility in Korean manufacturing. In Korea there was an abrupt incidence of active unionism unleashed in 1987. The authors show that the short-run employment adjustment (one to six months) and hours adjustment (one month) of regular manufacturing workers decreased in the post-1987 period as compared to the pre-1987 period. However, negative union effects on employment adjustment were limited to male, production, and regular workers; Korean employers responded through increased employment of daily workers (workers with employment contracts shorter than one month) and aged workers (55 or older) and also through the higher flexibility of female workers. Furthermore, a significant part of the decrease in employment flexibility (for instance, 35 percent of the decrease in one month output elasticity of employment) is attributable to labor market changes: a tighter labor market with fewer young workers made separation more procyclical.

Warner examines international wage determination using data on wages and salaries for the year 1998. Across countries, wage levels are correlated strongly with local GDP per worker, but the strength of the relationship depends on the extent of foreign language knowledge of managers and varies by occupation. Holding constant GDP per worker, wages also are correlated with the intensity of local competition, and lower wages with minimum wage rules. Across companies, holding constant national differences, wage levels are correlated with: export orientation and multinational status, but the latter only in poorer countries; size of company worldwide, but not domestically; recent revenue growth, but not recent profit performance; E-mail use; and economic sector. Global forces impinge on wages though a number of channels but generally have stronger impacts on executive salaries than on wages in lower-paying occupations.

Fields and his co-authors use panel data to analyze household income mobility in both monetary and welfare terms in four different economies: Indonesia, Spain, South Africa, and Venezuela. They confirm that during the 1990s households in all four countries experienced large income changes, and they examine the characteristics and events of household that are associated with upward and downward income mobility.

Kleiner and Ham examine the impact of national levels of unionization, strikes, bargaining structure, public policies toward labor, and collective bargaining within the firm and nation on a country's foreign direct investment (FDI). As an additional test of the impact of labor market institutions and state labor market policies, they examine its effect on the economic growth of U.S. states. Initially they model the decisions of firms, and then nations, as they decide their trade-offs of social equity and economic efficiency. Using data from 20 OECD nations from 1985 through 1995, and from U.S. states for 1990 to 1999, they show that higher levels of industrial relations institutions are usually associated with lower levels of FDI and slower economic growth for U.S. states. However, within the context of industrial relations policies, their results do not necessarily suggest that a nation or state would be better off trading social equity for higher levels of economic efficiency.

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