At a time of global economic uncertainty, the issue of trade and employment is becoming the focus of public debate – particularly with news of large scale redundancies in the media. If this trend continues, there is the risk of increased calls for protectionism here in Australia (as has already occurred in the USA). This is a concern because we all know what has happened in the past when the world has returned to protectionism – mass unemployment, inequality and conflict extending well beyond the trade sphere.
Much of the pro-trade argument in the debate centres on the notion that ‘trade creates jobs’, which is sometimes misused by some who claim that if exports create jobs, then imports must cost them. But this misses the point. The main rationale for trade (both exporting and importing) is that it improves the overall productivity and international competitiveness of the Australian economy, which helps lock-in low unemployment and long-term job security.
But what about exporting companies themselves? Do they make better bosses? Well, yes, on average. There is evidence at the micro level that exporters, on average, improve the quality of employment in Australia, as they are innovative, invest in technology, education and training, and achieve higher levels of productivity and profitability, relative to domestic businesses. They certainly pay better. According to Austrade research, exporters, on average, pay 60 percent higher wages than non-exporters, but are also found to achieve higher standards of occupational health and safety, equal opportunity employment practices, better working conditions and are more likely to be unionised and use collective bargaining agreements when compared to non-exporters. The result of this Australian study is also consistent with overseas studies of exporters and the labour market in both mature and developing countries as diverse as Bulgaria, Chile, and Taiwan.
In addition, foreign investors can have a positive impact on the labour market. A study by Access economics on the effect of Foreign Direct Investment (FDI) on jobs found that a majority of foreign-owned firms in Australia accounted for 14 percent of employment (equivalent to around 1.3 million jobs) and made significant contributions to output (value added), exports and R &D expenditure. These findings have been replicated in developing economies – particularly in China.
So, is trade really a magic wand? Not on its own. Openness is necessary but not sufficient for superior labour market outcomes. That is, having an open economy helps employment opportunity, but countries still need social safety nets and labour market institutions that protect the bargaining power of the weak, and help workers adjust to changes in the overall economy. We’re really learning now, at a time of global financial crisis, that social protection (social safety nets and well functioning labour market adjustment institutions), not trade protection, is what is needed to cope with major demand shocks to the economy.
Tim Harcourt is the author of The Airport Economist and is the Chief Economist at the Australian Trade Commission (Austrade). You can read his blog at: www.austrade.gov.au/economistscorner
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