May 2, 2008

Globalization, jobs and...laziness

If you ask people what's bad about globalization, they will most probably answer: a) it flattens out cultural differences; b) it threatens job security. The first issue was addressed in a recent post. Let's consider the second issue through the lenses of a paper that attracted my attention some time ago. The trade economists Donald Davis and Jim Harrigan (some of you may have attended the latter's presentation during the recruitment week) recently wrote a paper that shows how globalization (read: trade liberalization) can increase unemployment and destroy 'good jobs', defined as the higher-wage jobs. Yes, the ones that pay well and require the employee to wear a tie (or a tailleur). They use the theory of efficiency wages. If unchecked or poorly monitored, the workers will shirk and watch youtube videos on the job, so the firm needs to set efficiency wages to induce the worker not to shirk. Since wages are above productivity, the labor market does not clear, and involuntary unemployment emerges in equilibrium. So what? They assume that monitoring costs are firm-specific. If this rings the bell of Melitz's model (or paradigm, if you want) you are on the right track. Workers with the same productivity working for different firms earn different wages. The 'good jobs' are the one associated with firms whose monitoring costs are high, because they pay higher wages. Conversely, the 'bad jobs' are in firms with more efficient monitoring technology, because these firms can afford to pay a lower premium to fulfil the no-shirking constraint.
What are the effects of globalization? If firms have the same productivity, and only differ in monitoring costs, trade liberalization makes firms with the highest monitoring costs exit. Since these firms were paying the highest wages, trade destroys 'good jobs' because it destroys rents associated with the cost of monitoring shirking. As a result of the exit of high-wage firms, the average wage in the economy falls, as so does the rate of unemployment. Thus, under this scenario, trade destroys good jobs but reduces unemployment. Interested empirical readers would then test the hypothesis that, controlling for productivity, trade kills good jobs. That cannot be too bad, except for the guys who were paid a lot of extra money not to play minesweeper. Consider now the general case in which firms are heterogeneous both in productivity and monitoring costs. Believe it or not, there are good empirical reasons to consider that firm size is positively correlated with the wage. This means that larger firms face higher monitoring costs and thus set higher efficiency wages to prevent shirking. In this case, a trade liberalization that leads to a contraction of small firms and an expansion of large firms will increase the average wage. While a rise in the average wage makes job loss less costly, it also leads to more unemployment. So there is a trade off between good jobs and unemployment. And globalization might increase good jobs at the cost of more unemployment!
Now, you might argue that workers are heterogeneous, so that the good jobs are the ones accruing to the most productive workers. I won't wrestle with this, it makes perfect sense and Yeaple wrote a nice paper showing what happens in this case. But if the "good" jobs are good just because of rent extraction by the lazy guys, the society as a whole should prefer less unemployment to more good jobs. This makes a case against globalization. However, we all know that governments respond both to society and – probably to a larger extent – to interest groups. Will the interest group of lazy guys start lobbying hard in favour of globalization? Who wants to join?

3 comments:

Sebastian said...

Now I am not an expert on this field, but the assumption that high wages are primarily due to the monitoring cost seems rater odd. Since the results seem to stand and fall with this assumption I can not put too much weight to this channel of the story. By the way globalization does also something very different: just ask yourself why all these Germans (like me) or Italians are moving to lovely Switzerland. The effects of which can be very similar or very different depending on your assumptions about the immigrants and the local labor market. For my part "globalization" gave me a job and a (real) pay which is much higher than in my home country for the same job. The question that remains is whether I play more often minesweeper due to that....

Dany said...

something not to clear for me is why the firm with high monitory cost should exit. If this is industry specific, the firms from abroad will face the same problem, and what matters is if you have comparative advantages, not monitory costs. Or monitory cost is just treated as a classical fixed cost a la Melitz? if is like this, do not make much sense. (sorry, I was too lazy to read the paper, I preferred to shirk…)

cosi said...

Monitoring costs are part of variable costs. Big firms are big because they are more productive, i.e., the cost-of-monitoring disadvantage is more than offset by the labor-input coefficient advantage. Since they are more productive, their profits and mkt share increase w/ liberalization. To anybody interested, I can send an e-mail with a super simple numerical example I cooked up to understand the stuff when I was first reading it.