By Ajit K. Ghose, Senior Economist, Employment Strategy Department, Employment Sector, International Labour Office, Geneva

From the Intro: It is widely believed that trade liberalization has been a major cause of the growing inequalities between skilled and unskilled labour in industrialized countries. Since the late seventies, gaps between skilled and unskilled labour in terms of wages and/or unemployment rates have been widening in these countries. This has also been a period when barriers to international transactions have been progressively falling. Many economists argue that these developments are causally linked. Trade liberalization, the argument runs, has led to a shift of production base for unskilled-labour-intensive manufactures from industrialized to developing countries, thereby causing a decline in the demand for unskilled labour in the former. This has led either to a decline in the wages of unskilled labour or, if there are wage rigidities, to a rise in the unemployment rate of unskilled workers. There is also a fear (not always openly expressed) that these developments may not be just one-off in nature. Given the radically different age-structures of population, labour force growth will be much faster in developing than in industrialized countries in the foreseeable future. This will mean a declining trend in the ratio of skilled to unskilled workers in the world labour force. Given such a trend in an increasingly globalized world, many fear that it will be difficult to halt the decline in the fortunes of unskilled workers in industrialized countries.

The argument, derived from the standard theories of international trade, appears plausible enough but is not in fact strongly supported by the empirical evidence available so far. There is virtual consensus among economists that two-way trade in manufactures between the industrialized countries of North America and Western Europe and the developing countries of Asia and Latin America has been growing since the mid-eighties; that less skilled workers in the industrialized world have been facing either declining real wages or rising unemployment or both; and that the growing gaps between skilled and unskilled workers in these countries are not adequately explained by the supply-side developments in their labour markets. But there is no consensus on the idea that the changes in trade patterns in fact explain the labour market developments. In the first place, there are controversies on appropriate methodology of using the available statistical data for assessing the effects of trade on labour markets. Secondly, most of the estimates (irrespective of the methodologies used) show the effect of trade to have been rather small. Thirdly, the observed movements of relative prices do not seem to suggest trade as a major cause of labour market changes. Finally, a competing hypothesis, which focuses on the nature of autonomous technological change, appears to perform better in some respects in explaining the labour market developments.