The Wage and Unemployment Impacts of Trade Adjustment

In recent years the labour market consequences of trade liberalisation appear to have become a major source of anxiety. The spectre that freer trade leads to job josses and induces a ‘race to the bottom’ in wages appears to be widespread among the general public, and has frequently spilled over into the policy arena.1 These concerns are not inconsequential. In the European Union, for example, negative perceptions towards globalisation were highlighted as one of the main reasons for the recent rejection of the European constitution by French and Dutch voters (Niblett, 2005). At the same time, opinion polls carried out in the older member states point to a rising anti-Europe attitude, partly reflecting fears that an enlarged Europe may be amplifying the threats of globalisation by opening borders to cheaper labour and products from the new member states (Dempsey, 2005).2 Concerns about this issue are also evident in the US. In a speech made just before his visit to China in March 2007, Treasury Secretary Henry Paulson Jr. argued that: Despite our healthy economy and rising living standards, more and more Americans seem to doubt that trade brings greater benefits than costs. Some politicians from both parties, reflecting what they are hearing from their constituents, are moving further toward embracing protectionism. This is a worrisome trend. (…) We must make it a priority to help workers succeed in our rapidly changing and increasingly global economy, while maintaining our commitment to open markets and the benefits that come with them.3