Globalization, Technology and nequality Lecture 4: Trade, O shoring and nequality Gino Gancia July 5, 2012 Gino Gancia () Lecture 4 July 5, 2012 1 / 26
Trends in Wage nequality within-country wage inequality has increased in several countries in the past decades some measures of wage inequality: 1 returns to college education or college premium 2 skill premium = best-known case: wage of white-collar workers wage of blue collar workers US, 1980-2008: college premium +33% international evidence more scattered due to lack of data: sample of 35 countries in the 1980s: skill premium +8% (Epifani & Gancia, 2008) sample of 26 countries 1990-2005: college premium +7% (Parro, 2011) Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 2 / 26
US Evidence: Skill Premium and Skill Supply since the late 1970s, in the US both the skill premium and the relative supply of skilled workers have increased... Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 3 / 26
Trends in US Real Wages...and the real wage of unskilled workers has declined/stagnated Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 4 / 26
Main Explanations for Rising Wage nequality wage trends in the US motivated a large literature main explanations: Skill Biased Technical Change (SBTC) globalization why globalization? timing: the last globalization boom started in the late 1970s the correlation between measures of wage inequality and a country openness ( import+export GDP ) is often positive Goldberg and Pavcnik (2007): F trade liberalization in 1980s-90s! rising skill premia in Mexico, Colombia, Argentina, Brazil, Chile, ndia, Hong Kong Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 5 / 26
Evidence: Trade and Returns to Education Period % Change in the Returns to Education.1 0.1.2.3 HND PER NLD FN S WE NLD GTM K OR FN ESPNOR PHL CAN KEN B RA THA CHE SLV POL N OR CAN AUS AUT VEN N OR B OL CR CYP TA CHL TA DN GRC DNK USA GRC P AN AUS USA P RY GBR B RA NLD PC RT NLD OL BRA SWE JPN PAK TA AUT CHL N LD GRC MEX CHN PSWE RT KOR THA CR GHA NLD PHL FN MEX GTM NC SWE.05 0.05 Period Change in the Openness Ratio slope coeff. = 1.23 (t = 2.90) sample: 40 countries observed between early 60s and late 90s Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 6 / 26
Evidence: Trade and the Skill Premium % Change in the Skill Premia.4.2 0.2.4 PAN E GY P ER FN KOR TZA ETH GRC J PN TA CAN GTM GBR DNK B GD USA AUS ND S WE CYP P AK AUT E SP DEU RE COL MEX VEN URY P HL TUR CHL LUX FJ MYS.4.2 0.2.4 Change in the Openness Ratio: 1980 90 slope coeff. = 0.58 (t = 3.96) sample: 35 countries observed between 1980 and 1990 Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 7 / 26
Evidence: Trade and ncome Distribution Period % Change in the Gini Coefficients.1.05 0.05.1 TTO MRT J OR ESP B RA TUR ESP AUS S WE THA HND CHL TZA SYC KOR NOR FN ZMB LKA CAN CR TUN NLD NGADN HKG PAN PRT GTM GBR COL P HL FRA PAN GBR FRA MEX K ORTHA VEN TZAVEN ETH ECU BGDNZL N ZL LKA GRC MYS LSO SWE JPN MEXZMB COL NZL BRA P ERBEL S LEJPN NOR NER B RA CHL CAN MEX HKGTUN RN FJ GER NLD LUX GBR PAKND THA GER AUS ND SEN ND CAN PAK SLV M EX JPN GBR P AK TA B GD MUS DNK P AK BOL PER NOR DNK ND BRA VHND MDG DN CR PAN SLV B GD FN PHLJAMVEN DOM EN BGD DN DOMZMB THA C OLP HLND CAN E CU DN GAB CR N MDG OR DN RL GER THADNEGY TUR PER EGY K OR PAK JPN JPN BGDPER ESP CR NB LDRA SWE LKA FNPRT PRT DZA PHL SWE MYS ESP GRC GHA RL TUN MEXNLD BEL TUN HKG MUS NORTACAN CV LKA JAMJOR TATTOTTO GBR K ORVEN THA FRA DNK LKA FN AUS GERCOL HND CHL TZA FN JPN SWE NOR ML DNK FRA KOR E SP K OR D OM NGA J OR MYS HKG MYS SGP.05 0.05.1.15 Period Change in the Openness Ratio slope coeff. = 0.13 (t = 2.40) sample: 68 countries observed between the early 60s and the late 90s Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 8 / 26
A Basic Framework GE model with 2 sectors and 2 factors (high- and low-skill workers) aim: study the e ects of trade and technology on the skill-premium CES utility U = Y = i h(y l ) ɛ ɛ 1 + (Y h ) ɛ ɛ 1 ɛ ɛ 1, ɛ > 0 Y h = skill-intensive good Y l = low-skill intensive good ɛ = elasticity of substitution between Y l and Y h Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 9 / 26
Demand and Supply to nd relative demand, solve: h i max (Y l ) ɛ ɛ 1 + (Y h ) ɛ 1 ɛ ɛ 1 ɛ Y h,y l P h Y h P l Y l P h, P l = prices of Y h, Y l FOCs: Y 1 ɛ (Yh ) ɛ 1 each sector employs one type of labor: = P h! Y h Y l = ɛ Ph P l Y h = A h H and Y l = A l L H = supply of skilled workers, productivity A h, wage w h L = supply of low-skill workers, productivity A l, wage w l Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 10 / 26
The Skill Premium perfect competition price = marginal cost P h = w h A h and P l = w l A l skill premium: w h w l = P h P l A h A l use P 1/ɛ h P l = Yh Y, Yh l = A h H and Y l = A l L w h w l = Ah A l ɛ 1 ɛ 1 L ɛ H Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 11 / 26
The Skill Premium: Determinants determinants of the skill premium 1 technology: F F w h w l = Ah A l ɛ 1 ɛ 1 L ɛ H if goods are gross-substitutes (ɛ > 1), skill-biased technical change (higher A h A l ) increases w h w l if ɛ < 1 it is the opposite, but this case is empirically less plausible 2 endowments: F an increase in the relative supply of one factor reduces its relative reward, stronger e ect when ɛ is low Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 12 / 26
Trade and the Skill Premium e ect of trade: similar to a change in endowments integration between two identical countries: equal to doubling H and L no change in the skill-premium integration between a skill-abundant North and a skill-scarce South : H L w h w l < > H + H L + L > H L wh w l trade < w h w l trade raises the reward of the relatively abundant factor Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 13 / 26
N-S Trade and the Skill Premium North-South trade can explain the increase in the skill premium in the North yet, this mechanism fails to convince in practice why? 1 most of trade is between similar countries: F the volume of N-S trade is considered too low (particularly in the 80s and 90s) 2 wage inequality has increased also in many less-developed countries F see Goldberg and Pavcnik (2007) Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 14 / 26
Epifani and Gancia (2008) models of new trade theory with increasing returns (RS) and monopolistic competition can explain: why trade between identical countries may increase wage inequality why trade may lead to a pervasive increase in skill premia same framework as before, but: 1 skilled workers produce di erentiated goods with RS 2 unskilled workers produce homogenous goods e ect of trade: create bigger markets di erentiated goods are subject to RS! bene t more from bigger markets skill is more valuable in large global markets Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 15 / 26
Skill-ntensive Sector Y is a CES baskets of di erentiated varieties: Y = y α l + n i=1 (y h,i ) α 1/α, α 2 (0, 1) n = number of skill-intensive varieties (endogenous) ɛ = 1/ (1 α) > 1 = elasticity of substitution demand for any variety y i : max y i [Y n i=1 p h,i y h,i p l y l ] from the FOC, p i = Y 1 α y α 1 i : y i = p 1 α 1 i negative function of its own price, with elasticity σ = 1/ (1 α) Y Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 16 / 26
Skill-ntensive Firms: Monopolistic Competition one rm = one variety, total cost function: TC = (F + cy h,i )w h F = xed cost, c = variable cost, all costs are in units of labor prices set to solve: max p h,i π h,i = p h,i y h,i [F + cy h,i ] w h s.t. : y h,i = p 1 α 1 h,i Y rm takes Y as given, FOC: markup over the marginal cost simplify: set c = α! p h = w h p h,i = p h = cw h α Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 17 / 26
Firms Scale and Number Free Entry (FE)! π h,i = 0: (p h cw h ) y h = w h F! y h = F 1 c FE pins down rm scale simplify: set F = 1 c! y h = 1 labor market clearing (demand = supply): (F + cy h )n = H! n = H with a xed scale, an increase in H is accommodated by an increase in the number of rms L-intensive sector: single good, perfect competition: y l = L Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 18 / 26
Trade and the Skill Premium skill premium (use p i = Y 1 α y α 1 i ): w h w l = p 1 α h yl = = L 1 α p l y h skill premium is increasing in L and independent of H! why? an increase in H creates its own demand e ects of trade: trade integration is like an increase in H and L new e ect: a bigger market can sustain a larger number of skill-intensive varieties! similar to SBTC? trade integration always increases the skill-premium! Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 19 / 26
O shoring and Wages we now introduce o shoring in a way inspired to: Grossman & Rossi-Hansberg (2006, 2008) Acemoglu, Gancia & Zilibotti (2012) focus on o shoring of L-jobs (more relevant case) production of Y l requires intermediates that can be separated geographically bene t of o shoring: move production to low-wage countries (South) but only a fraction κ < κ = L+L L of intermediates can be o shored new result: o shoring of unskilled jobs can, in some cases, bene t domestic unskilled workers! Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 20 / 26
ntroducing L-O shoring preferences: Y = i h(y l ) ɛ ɛ 1 + (Y h ) ɛ ɛ 1 ɛ ɛ 1 Y l is a CES function of a unit set of intermediates intermediates [0, κ] are o shored to the South wages: Z 1 1/α Y l = y i α di = h(1 κ) 1 α L α + κ 1 α (L ) αi 1/α 0 F we used yi = L /κ and y i = L/(1 κ) no o shoring in the H sector: Y h = H equal to MPL w h = Y H = Y 1/ɛ Y 1/ɛ h w l = Y L = Y 1/ɛ Y 1/ɛ l Y 1 α l (1 κ) 1 α L α 1 Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 21 / 26
L-O shoring and the Skill Premium e ects of κ: w h = L1 α w l Y 1/ɛ h (1 κ)α 1 Y 1 α 1/ɛ l 1 direct e ect: less demand for L in North! higher skill premium 2 e ciency e ect: higher Y l! (?) if tasks are su ciently complementary (α < 1 w h w l why? recall Y l (κ'0) κ intuition: is a U function of κ!, and Y l (κ' κ) κ! 0 1/ɛ) with enough complementarity, cost saving on [0, κ] increases the demand for workers on [κ, 1] too! lower skill premium but this e ect disappears as wl! w l Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 22 / 26
L-O shoring and the Skill Premium wh/wl 1.6 1.4 1.2 1.0 0.0 0.1 0.2 0.3 0.4 0.5 kappa ɛ = 1.6, solid: σ = 5, dashed: σ = 1.25, σ = 1/ (1 α) Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 23 / 26
Feenstra & Hanson (1997, 1999) the removal of barriers to Foreign Direct nvestment has triggered o shoring from US to Mexico this relocation of economic activity can increase wage inequality in both countries why? because o shored activity are low-skill intensive relative to US production, but skill-intensive relative to Mexican production thus, the skill-intensity of production (and thus the demand for skill) increases both in US and Mexico Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 24 / 26
Alternative Approaches: Trade, Sorting and nequality so far, only two skill levels (H and L): in reality there are many skill levels and inequality has increased also within skill groups with more skill levels sorting (who works with who) becomes important Trade, Sorting and nequality: trade bene ts disproportionately more productive rms, more productive rms hire more able workers! trade bene ts relatively more high ability workers F Yeaple (2005), Ohnshorge and Tre er (2007), Costinot and Vogel (2010), Helpman, tskhoki, and Redding (2010, 2011), Monte (2011) O shoring, Sorting and nequality: globalization makes international teams of workers possible! "good" workers in the South form teams with workers in the North! "bad" workers in the South are segregated! their wage falls F Antras, Garicano & Rossi-Hansberg (2006), Kremer & Maskin (2006) Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 25 / 26
What Did We Learn? trade/o shoring can a ect factor prices (the skill premium) in rich ways trade (even between similar countries) may lead to a generalized increase in wage inequality trade/o shoring can have e ects similar to (biased) changes in productivity trade may increase relatively more the productivity of skilled workers o shoring of labor-intensive tasks may increase the e ciency of unskilled sectors F but only if tasks are very complementary in more advanced models, trade can even trigger SBTC di cult to distinguish between trade and biased technical change Gino Gancia (BMSS 2012) Lecture 4 July 5, 2012 26 / 26