International trade and employment in French and West German manufacturing industries

Abstract

The debate over the implications of international trade for the labour market is a prominent one both among economists and the general population. Because of that fact, and because of the absence of a comprehensive economic theory that explains the implications of trade for labour, empirical study is needed to provide a basis for the development of theory and to provide an objective basis for making policy decisions. This study aims to fill a gap in the literature by studying each of eight manufacturing industries individually, rather than pooling these together into an aggregate study as is the case in much previous work. Using data on two-digit ISIC (International Standardized Industrial Classification) manufacturing industries in France and West-Germany for the period 1970-1991, it estimates a labour demand equation for each of the eight industries and includes indicators of trade as explanatory variables. The first of the two main conclusions is that trade appears to have an effect on employment over and above its indirect effects through output, wages, and other variables. The second main conclusion is that this effect differs across industries. The implication of these conclusions is that previous studies which pool disaggregate data to look at the manufacturing industry in the aggregate may fail to provide important information about how individual industries adjust. This means that their predictions may not provide useful information on the partial equilibrium effects of trade and trade policy, and because they say little about how firms or industries adjust they do not provide useful information for the development of further theory in this area. The overall implication of this study is that more work should be carried out to ascertain the effects of trade on the labour market at a disaggregate level. Recommendations are made regarding the issues to be considered in undertaking further study in this area, and regarding approaches that should be taken in order to provide information for the development of theory, and in order to obtain results that improve the information sets of policy makers.