China: Labor Market Fundamentals Predict Stagnation

I recently wrote a research paper on China’s labor market, and how the structure and distribution of firms as well as wage effects  might be helpful in forecasting the nation’s growth trajectory.

The study uses a mix of theoretical frameworks and empirical research to construct conclusions. The data comes from the World Bank Enterprise Survey series, with a data set from 2003 and one from 2012.

My conclusion: China is moving in the right direction, but partial and inefficient privatization has blocked the labor market from fully blossoming.

Some key takeaways:

  • Most developed countries witness a concentration of employment in large firms, while the number of small firms declines. China has experienced a significant decline in small firms, but it has not seen a significant increase in employment share inequality.
  • China has a negative firm size wage in 2012 and in 2003. This means that larger firms actually pay lower wages all else equal. This persists even with education and market share controls.
  • The firm size wage effect varies greatly across industries.
  • The negative firm size wage effect has become less negative over time.

To read the full paper and to view the graphs and tables, check out the PDF:

Full Paper

Thoughts on Homelessness

I was riding to UCLA on Westwood Blvd, when suddenly a voice pierced through the cloud of my thoughts, “Do you have a moment?” I will admit I was startled. Most people do not talk to bike riders on busy streets. The source of the voice startled me even more than the voice itself: a woman in a wheelchair with two huge shopping carts full of objects.

I will be honest. My first compulsion was to keep going. I could easily feign ignorance, and no one blames a biker for not stopping. But something made me turn around. Part of it was a growing interest in the problem, or the existence of homelessness in the United States. Another part was the clarity of the voice itself.

So I turned around, and braced myself for the typical plea for spare cash. Again, I was surprised. “Can you help me push my cart across the street?” She did not want money.

Her voice was clear, direct, and understanding. She hedged her request by telling me that if I could not do it, she would understand. She also told me that I had to do it carefully. She did not want any of the objects falling off the cart.

I was immediately a little defensive, because I had mentally prepared myself to reject a request for money. I am a big believer in donating to charities rather than people who beg, mainly because I think begging only sustains the problem, and secondly because some beggars can become aggressive.

So I came off with some admittedly harsh questions. “Why do you want to keep all of this? What is it?”

She answered frankly and again, directly. “It is my stuff. I am trying to move it to Santa Monica.”

The cart was full of what most people consider trash, interspersed with a few items that might be useful. I asked her if it was for recycling. She said it was not. All the while I was considering how dauntingly difficult the task she was determined to complete really was. The cart weighed at least 100 pounds. The worn wheels made pushing it almost impossible. Added to that, she had two carts and was sitting in a wheel chair.

I helped her push the cart across the street, and it was extremely difficult. She almost lost the second cart as she pulled it foot by foot across the sloped street. Our journey of 50 feet felt felt like a slog of 50 miles. Those 50 feet were only the tip of a journey she was convinced to complete, that would be at least 5 miles by foot.

All of this perplexed me. Because the lady was perfectly comfortable explaining why she was doing what she was doing, yet to a causal observer what she was doing must have appeared to be the epitome of irrationality.

And that was when the pieces started to fit together. Perhaps first world countries have difficulties fixing problems like homelessness because we assume irrationality and forget that traditional utility changes when people are closer to subsistence. People may act differently, but they still are trying to maximize their own well-being.

This woman could explain herself, and her impossible journey, because to her the clutter was a hedge. A hedge against the uncertainty of the future. Most of it would be useless, but obtaining each object was nearly cost less, and at the right moment some of it could be immensely valuable.  To someone above subsistence, the small probability multiplied by the value in the rare situation where it was useful would never pass any cost benefit analysis. But to someone near subsistence, the negative implications of a situation like this could be so large that the small probability times the large consequence could be sizeable.

These are ideas that are frequently bandied about in development economics, but it is unlikely that most cities employ developmental economists or even consider the lessons that these economists are learning in developing countries. To the average passerby, considering homelessness in conditionally rational terms can yield compassion.

I still do not think an assumption of conditional rationality should compel someone to hand out money to pan handlers. But I think it can inform nonprofits on ways to help homeless people. Perhaps programs that can convince homeless individuals that they are insured against disaster can help them overcome some of the issues that stick with people who were previously homeless.

 

 

 

 

The Question of Sweatshops: Cutting out the Bleeding Heart Arguments

Fair trade is an interesting movement based on the premise that trade is not necessarily bad, but it needs to be done in a socially responsible manner to “help the poor.” Because the movement is not pushing for any government action, only private action by individual firms and consumers, I do not have a general problem with it. However, there is evidence that fair trade in some industries, like coffee, is actually hurting small growers or producers in poor countries. But that is a discussion for a different time.

One of the main premises pushed by fair trade supporters, and skeptics of globalization more generally, is that unrestrained free trade has led to sweatshops, which by their very nature are wrong. To combat this, we need to boycott the companies with unfair labor practices and push our governments to restrain outsourcing of labor.

This is a narrative that pulls at the heart strings. But deeper analysis shows that it privileges rich consumer conscience (and rich country labor unions) over poor worker welfare. Let me explain.

I sat in a class several years ago when a professor explained why he does not necessarily oppose sweatshops. Naturally, there was an uproar. Students stood up, voicing their moral outrage. But the professor continued on calmly. He made an interesting distinction between types of sweatshops:

  • Prison Sweatshops: Places where low skilled workers are lured in and then not allowed to leave. These sweatshops have locked doors or other restraint mechanisms that make leaving impossible.
  • Long Hour Sweatshops: Places where low skilled works may work for long, often obscene hours under less than ideal conditions for low pay. However, unlike the prison sweatshops, workers may leave the job at any time.

The professor went on to say that he is vehemently against the first type, because this is very obviously a human rights violation. However, he is not opposed to the second. I agree, and the reason is because of the counterfactual.

To consider the counterfactual we must consider what would happen if the firm employing the people did not exist. And it is the romanticized counterfactual that drives the knee jerk opposition to all sweatshops. We can presumably accept that if people are allowed to leave a low-skill manufacturing job at any time,  (meaning they are employed in a type 2 sweatshop)  then they are at the best paying job possible in their area. If this is true, it means that absent the sweatshop job, the person would be working at a lower paying, often locally owned job, or not working at all. If the person is not working, they are not sitting comfortably receiving an unemployment check like in the U.S. They are likely near starvation and suffering from diseases that they cannot afford vaccines for.

Many opponents of long hour sweatshops with conditions not on par with rich western countries forget how American industry started. They also paint a picture of rural poverty that is out of touch with reality. In general, sweatshop labor that does not involve coercion must make the people employed better off then the rural poverty experienced by the unemployed in that country. The absence of an “evil firm” that has sweatshops might make purchasing vaccines or food for children impossible.

With this new perspective on the counterfactual, the debate changes: sweatshops are not glorious. They are not comfortable. But trying to end them without some alternative replacement is dooming impoverished workers to even worse poverty.  Poor countries rely on their comparative advantage in unskilled labor to produce certain manufactured goods at competitive world prices. Unless the morally outraged volunteer to invest their own capital in a foreign production plant, or unless they have some economically feasible alternative to multinationals, their outrage is nothing more than a drug to assuage their own conscience.

 

Higher Education Funding Series: How the Wrong Assumption Drives the Wrong Policies

The affordability of college in tandem with the student loan debt crisis has been a hot topic at UCLA and a lot of other places for a long time now. The topic is important, because as a society we have chosen to provide federal support for education. The reasons for this choice are simple:

  • Education is a primary way through which individuals can increase their lifetime wealth and thus exercise income mobility. I call this the poverty prevention reason.
  • Education provides positive externalities to society, meaning that the benefits of education accrue not just to the student but also to those surrounding the student, and the US economy as a whole. This means that in a purely free market, one would expect education to be under demanded.

I am not going to argue with these, even though there is plenty to argue about. (I would imagine that the marginal benefit of each year of education beyond high school declines). Instead, I will take these as the primary goals of federal support of education. Over the course of several articles, I will discuss why current reform propositions will fail to advance these goals. In this first entry, I want to start with background and discuss a core wrong assumption.

Most reformers suggest one of several options:

  • Pegging the federal student loan interest rate at a lower level
  • Enacting a loan forgiveness program or easing the process of student loan bankruptcy.
  • A new, interesting idea: Giving tax breaks to companies that help students pay off their debt.

Although each one has different effects in terms of who it helps, the overall net effect is the same: making it easier to acquire money to go to college.

A large number of advocates who are currently in college start from the assumption that college is for everyone. This is an honest mistake, which is likely the result of generalizing their own experience (they chose college) onto everyone. It is also likely a result of those advocates mistakenly equating the idea that “education is good for everyone”, with college is good for everyone. The first phrase is almost certainly true. For the individual, education increases their marginal product of labor, that is it makes them able to produce things more efficiently, as they are able to use better tools with better skill. If you accept, at least loosely, that a person’s real wage is equal to their marginal product of labor, than this increase means they are unequivocally better off.

But education is a broad term, and college attending lobbyists assume that it only means a liberal arts education. In truth, a liberal arts education is only a small subset of the things that count as education. Technical schools, internships, jobs, military service, self-training, Khan Academy, and so many other things are sources of education. All of them can equip people to increase their own skills and therefore increase their wage. All of them enable people to increase American output. They are no more of less honorable or useful than a traditional college degree. And in many cases, they may be more useful.

This is because when someone decides how to increase their human capital through education, they not only consider benefits but also costs. And in a pure market, internships and apprenticeships, while perhaps lower in benefits, are also lower in cost. They do not require a person to give up working fulltime, and they rarely involve paying tuition. In our current market, the government has subsidized liberal arts degrees while disadvantaging internship and apprenticeship opportunities.

The subsidization of liberal arts degrees is through loan forgiveness, federal grants, and held down interest rates. The disadvantaging of internships is indirect. The mechanism is the national and state wide minimum wage laws. Such laws prevent a business from hiring someone in a training position for a low wage. In many cases they force young people to accept volunteer positions with some educational benefit, which at times requires college enrollment (in order to receive credit).

The true travesty of this situation plays out when one connects the dots. Since federal aid is spent mainly on liberal arts education, and federal aid is paid for with tax dollars from U.S. companies and working individuals, it means that we are making some of the working individuals pay for the degrees of those in college. Further, we are making companies pay for degrees, when that tax money could have been used by the company to hire paid interns.

So to return to the original proposition: The higher education funding discussion is premised on a narrow view of education. And, as I have argued, this is mainly because the lobbying movement is composed of people currently in college. This drives the conversation towards further subsidization of one type of education. As I will show in my next post, the current solutions are only more of what we are already doing. And what we are already doing is driving the inefficiency of modern universities.

The Silver Bullet: How Free Markets Can Win Back the Millennial Generation

Freedom, specifically economic freedom, has a pr problem. For the past few decades, advocates of government regulation and state planning have successfully re-branded free markets as the philosophy of the past. In a two pronged attack, economists, educators, and politicians deftly chalked the 2009 crash up as a failure of the private sector, while rewriting history to portray market excess as the driver of the Great Depression. At the same time, progressive policies, like mandated health insurance, sky high minimum wages, trade restrictions, and new taxes gained political and cultural traction.

Enter millennials: a group of individuals, of which I am a part, who grew up during the pinnacle of this brave new age. We saw the mortgage bubble rise and fall. We immersed ourselves in the new wave of technological innovation, and we absorbed the media that came along with it. The reality is that progressive or pro-government messages have won the ground war. From influential, sexy economics books like Piketty’s Capital in the Twenty First Century, to well-produced Buzzfeed and AJ+ videos, the left has managed to blame capitalism for wealth inequality and present government as not only innocent, but as the savior. All the while, well managed and culturally relevant messaging is selling to America the idea that free markets and individual choice are ideas for the dustbin of history.

But there is a silver lining to this situation. First, the narrative that has been winning the millennial war is wrong.  It was not free markets that destroyed economic prosperity in the 30s and again in 2009. Any examination of the Smoot-Hartley Tariff, government subsidization of the mortgage industry, tight and lax monetary policy, and massive government intervention will tell a more nuanced story. It is not economic freedom that restrains wages and crushes advancement: it is regulation, union monopolies, minimum wages, corporate subsidization, state licensing requirements, and government paternalism. Of course, some of these ideas are debatable. But others, like the economic benefits of right to work legislation, are almost foregone conclusions.

Second, the internet and technology revolution has established itself as inherently pro-liberty. The internet has made competing sources of information accessible to the average person. Lyft, Uber, and Sidecar have begun to bring down the taxi monopolies. Ebay, Amazon, and other online retailers have forced conversations about sales taxes. WebMD and other websites allow for free medical advice. Acorn and Scottrade allow people with small initial deposits to begin investing. All of these changes have one thing in common: they mean more choices. And millennials, despite their learned inclination against free markets, like more choices.

What remains now is for a political force to leverage the millennial opportunity to counter the past few years of statist victories. The party of economic freedom has traditionally been the Republicans. But riding the millennial wave will take more than a few awkwardly produced videos by the national organization. It will take three fundamental changes.

First, the party must embrace a comprehensive and consistent view of freedom and liberty. This means dropping platforms like harsh criminalization of low level drug offenders, opposition to same sex marriage (at least adopting a more Rand Paulish position on this one), and support of massive state surveillance programs. Polls numbers suggest these positions are no-goes with millennials, and I contend that this is likely because they are not consistent with a philosophy of liberty. In the place of old platforms, the party can reorganize and debate more fundamental issues. One such issue, abortion, is a philosophical question where government action could be defended. If a fetus is a person, than laws against abortion are not only justifiable, but necessary to protect human liberty. A more nuanced set of poll numbers regarding abortion suggests millennials appreciate the need for a discussion on this issue. Other areas include new ground, like right to try legislation. People, especially those facing near certain death, deserve the chance to try experimental drugs. The FDA does not have the right to stand in their way. In the immigration debate, Republicans should spend time convincing the non-millennial base of the value of a more free and open immigration system. Such a system recognizes the realities of our global world, and it resonates with millennials, who due to the Internet and an increase in foreign students, feel connected to those who wish to make the United States their new home.

Second, the Republican Party has to embrace the technological revolution. While this may seem easy, it requires accepting not just the shining tools of the future but the cultural changes of the present. Many libertarian think tanks, like the Cato Institute and the Mercatus Center are already doing this. One mainstream Republican candidate, Marco Rubio, has made technological changes a pillar of his campaign. He should be commended, but he and the other candidates would do well to not just embrace the Amazons and the Ubers of the world, but also the Reddits, The Onions, and Khan Academies. Millennials and the younger generations already recognize the value in these and other noncommercial aspects of the technological revolution. By recognizing the value of the disruption and even sometimes social change that comes with technological, Republicans can rebrand themselves as the torchbearers of the future instead of the gate keepers of the past.

Finally, the Republican Party needs to be willing to form unlikely alliances to accomplish policy goals. Political elections often conjure hatred, and sometimes rightfully so. But Republicans would win political points for taking the higher road when possible to work with nontraditional allies. Tax reform and licensing reform offer two areas for this type of cooperation, where pro-market reforms can help reduce poverty.

Republicans should also drop the personal attacks on political opponents.  Rhetoric targeting a person’s religious beliefs or racial identity has become central to politics, especially with the rise of Donald Trump. And while his tactics may provide short term gains within the base, they are not sustainable in the general election or the future. Recent polls showed Trump polling at 25 percent among millennial conservatives, but dwelling on this result is missing the point. Conservative millennials are a small faction within a diverse generation. According to Pew Research, only 35 percent of millennials identify as Republican, meaning that even if the 25 percent number is accurate, it represents less than nine percent of the generation as a whole.

Overall, Millennials want action, not rhetoric. Some polling even suggests that the direction of this action is irrelevant. And if the Republican Party wants to win the hearts and minds of America’s future, it will need to act. It will need to generate ideas, be willing to evolve, and most importantly, embrace the full meaning of liberty.

Polling links:

https://www.aclu.org/news/international-poll-shows-millennials-have-positive-opinion-edward-snowden

http://www.people-press.org/2015/04/07/a-deep-dive-into-party-affiliation/

 

Millennials want action:

https://reason.com/poll/2014/07/11/millennials-like-action-support-both-pol

 

 

 

Ahmed’s Clock and Zero-Tolerance: A Personal Experience

When I read about Ahmed and his clock, I immediately thought of my own experience. And while my own run in with school discipline was different than Ahmed’s, both are examples of a major problem in today’s primary education system:  zero-tolerance policies. Such policies, and the decisions that result from them, often neglect the American tradition of innocent until proven guilty. Driven by fear, they also hand out excessive punishment, especially  to students with no previous disciplinary problems. I wrote a short essay on the subject over the summer for a speech class, and I encourage you to read it:

 

Last year, 15 year old Dontadrian Bruce held up three fingers in a picture of his school biology project. The next school day he was suspended. Several days later, he received a recommendation for expulsion, on the grounds that the gesture was similar to a gang sign.

Dontadrian is one of the many children that we are sacrificing on the altar of zero-tolerance school discipline laws. By mandating levels of punishment, schools and states are effectively applying mandatory minimum laws to the most vulnerable population of offenders- our children.

The high cost of the policy has not yielded any real improvements in child behavior. At the same time, each student suspended or expelled faces a harsh reality. Studies show that a single suspension doubles a student’s risk of repeating a grade, and in turn, repeating a grade raises the probability that a student will drop out of school by as much as 68%.

These problems impact society too. Adults without high school degrees earn significantly less than those with degrees, and they experience much more unemployment.

At this point I have a confession to make. I chose this topic because I, like Dontadrian, was suspended under a zero-tolerance policy. My freshman year of high school I designed a magic trick which caused a flash of fire to erupt when someone opened an altoids can. Like the stupid high schooler I was, I brought the thing to school. Later in the day, a drug dog randomly inspected my classroom. Because my contraption used a weird chemical found also in some bomb components, the dog sniffed out my backpack. I was taken to the dean’s office, where I talked to the police department. The chemical I brought to school turned out to be completely legal and perfectly harmless. Magicians and special effects artists use it all the time. The police filed no complaint against me. The school was a different story. After examing the case, the dean of the school had no choice but to open a computer program, and click an option in a drop down menu. His selection: “possession of a bomb-like object.” The punishment: expulsion.

I am happy to say that I got lucky. I met with an understanding superintendent and I happened to have an uncle who works in the special effects industry who could explain the situation. My expulsion got revoked and my suspension was reduced to only a few days. If they had not been, I would not be standing here today, and I definitely would not have gone on to attend college.  I would have been placed into a continuation school with little hope of accessing higher education.

But thousands of others, like Dontadrian, are not so lucky. We are allowing their small mistakes destroy the trajectory of their lives. This is why I urge you all to have no tolerance for zero-tolerance. Our children deserve something better than this travesty of justice, especially when their futures are the cost.

 

Comprehensive Analysis of the Rand Paul Tax Plan

In a follow up piece to an op-ed I coauthored last month with former Congressman Allen West, I wrote a comprehensive analysis of the Rand Paul tax plan. The analysis is published with the National Center for Policy Analysis, and it was featured on RealClear Policy on Saturday:

Comprehensive Piece on the Rand Paul Tax Plan

In short, I take a nuanced view of the proposal. It definitely reduces complexity and the overall tax burden, but the VAT approach to taxation has a few critical weaknesses.

Blending Social Protection Theory with Heckscher-Olin in Trade Agreement Analysis

In light of the recent trade deal controversies, I decided to post the following paper I wrote regarding how social protection affects free trade politics within various countries:

In the study of trade and market integration, two theories are very relevant: the Heckscher-Ohlin international trade theory and the Estevez-Abe, Iversen and Soskice theory about skill formation and social protection regimes. Specifically, an implication of the Heckscher- Olin trade theory is that in trade negotiations those who own a scarce factor will be against free trade, and those holding abundant factors will favor free trade[1]. The theory advanced by Estevez-Abe, Iversen and Soskice draws a connection between the types of skills formed in a country and the social protection regimes that are in place—specifically employment protections and unemployment insurance. While these theories are powerful on their own, I will investigate the possibility that together they can help explain some of the anomalies of the politics that surround free trade efforts in different countries.

My idea is only relevant when examining countries with similar factor endowments. For the purposes of this paper, I will only analyze countries with a relative scarcity of labor but an abundance of capital, land or both. Most OECD countries fall into this category, and this is convenient because Estevez-Abe et al only examine OECD countries in their skill formation theory[2].  It is important to note, however, that if my hypothesis is true in this initial phase of analysis, it should produce many testable implications for countries not in the OECD.

I have two possible hypothesized casual mechanisms. One is as follows: countries with high employment and unemployment protection have populations with more specific skill sets, while countries with low protections have populations with more general skills. This abstracts away the four categories outlined by Estevez-Abe et al, and combines them into two.[3] I assume that the scarce factor, which is labor, will generally oppose free trade. However, in countries where laborers have very firm or industry specific skill sets, this opposition will be more forceful because free trade will cause their industries to be exposed to potentially devastating competition from countries with abundant labor. These laborers will find it harder to transition to a new firm or industry. In countries with more general skill populations, labor will better be able to shift to a different industry or firm, and as a result will not be as forcefully opposed.

The second is as follows: I again assume that countries with high employment protection and unemployment protection have highly specialized labor forces. In this pathway unskilled workers will still oppose free trade to some degree, but they will not be as vehemently opposed, because they are insured against dramatic shifts in the market through unemployment and employment insurance. This story ignores skill sets and only examines the fact that risk is mitigated and removed from the unskilled worker as a function of social insurance. The largest implication of this is that in high protection societies, it should be domestic companies or employers that are marginally more anti-free trade then the average unskilled worker.

An interesting concept I will mention throughout this paper is something that I call “hiring (or employment) elasticity.” In countries with social insurance regimes that are based primarily on employment protection, firms will have low hiring elasticity, meaning that they will be unable to easily cut jobs or adjust their level of labor when the market shifts from something like a free trade agreement. Countries with high levels of unemployment insurance result in laborers with high “employment” elasticity: they can more credibly threaten or risk leaving their job because unemployment insurance in these countries pays out a higher replacement ratio.

In order to look at empirical evidence, I again keep with the Iversen theory and use their casual pathway—that employment and unemployment  protections cause a nation to be either more general or more specific in its skill sets. Specifically, that more protections result in more workers investing in specific skills, and less protections result in workers “self-insuring” by pursuing general skills. Because I accept this pathway, I combine their employment and unemployment protection metrics into one metric, which I call the protection variable. I combine them because of my earlier decision to abstract the groupings from four into two—one group of high protection specific skill countries, and one group of low protection general skill countries.

In an initial OLS regression analysis examining the effect of my protections metric on tariff levels in the early 1990s, I found an insignificant effect. I also found no significant effect from employment or unemployment protections taken alone or together in separate models.  However, this analysis used only 15 OECD countries and as a result did not fully control for all relevant factors. If more extensive country data for the rest of the OECD countries or perhaps other developing countries in general can be found, then more detailed large-N analysis can be undertaken. For now, I will explore some critical test cases to see if my hypothesis has any predictive power.

The first case is the EU-South Korea Free Trade Agreement that went into effect in 2010. This agreement would substantially lower tariff barriers however it is important to note that an initial review of the documents and press releases of the time reveals no significant opposition movement. The only noted opposition came in the form of French and Italian automakers, which feared Korean car imports[4]. The fact that there was little opposition to the FTA in general seems consistent with Hekler-Olsen, as the average salaries in South Korea and the European Union are almost identical, as is the relative level of capital. Because of this, European workers would not need to fear a fall in wages. The opposition coming from France and Italy also makes sense, as both countries have high levels of employment protection, and thus employers have low hiring elasticity. Their profits will bear the brunt of the cost of adapting to more automobile competition, as they cannot fire laborers. Italy also has extremely low unemployment insurance levels—and yet there was no visible opposition at the worker or grass roots level that I could see from a brief review of the reports. This case is thus mildly supportive of the second pathway.

In another instance, the United States became embroiled over whether or not to renew China’s Most Favored Nation privileges. Removal of such privileges would result in a change in tariff rates. This situation is interesting because it is clear that unskilled labor is the abundant factor in China but the scarce factor in the United States. Although the issue has clear implications for trade and the various factors in the countries, the point of contention was mainly China’s crackdown on protesters following the incident in Tiananmen Square[5]. This makes the case interesting, because it was clearly an exogenous shock to the free trade dynamic in the United States. As expected, one of the largest collective action groups representing labor causes, the AFL-CIO, issued a strong statement against granting China a renewal of status[6]. Based on a review of all press releases issued by the AFL-CIO in 1996, 1997 and 1998, I found that there were no other press releases regarding free trade issues. Taking this as a crude measure of importance, it seems clear that the AFL-CIO, and labor at large, took a firm stand on an issue that actually split Congress along nonparty lines[7]. Because the United States has the lowest level of employment and unemployment protection in the OECD sample of the Estevez-Abe paper, I take this firm stance as evidence that the second pathway is a better mechanism for the effects of social protections on free trade debates.

With these two cases in mind, I conclude that most anecdotal evidence points to the second casual pathway. To be precise, this pathway is that less social employment or unemployment protections will tend to make unskilled labor more vulnerable to market shifts due to free trade agreements. As a result, in countries with sparser protections, like the United States, Ireland, etc[8] the labor movement will be more actively opposed to free trade agreements. The empirical data that I reviewed, while not yielding anything conclusive, does tell the story that free trade agreements are complicated, and the relative strength of the factions involved will depend on population size, type of domestic industrial production, and institutional design.

The case of the South Korea-EU agreement also sheds light on the fact that there may be cause for more exploration as to the different effects caused by employment vs unemployment protections. The individual case does seem to suggest that perhaps employment protections cause firms to more actively oppose free trade because of reduced flexibility. This would be similar to how rigid employment regimes create higher natural levels of unemployment in many European countries. Finally, the Heckscher-Ohlin trade theory seems to hold true, especially in cases like the one observed in the United States. As one might expect, higher disparities in unskilled labor scarcity do seem to determine the level of activism on the part of the AFL-CIO.

 

 

 

Works Cited

Estevez-Abe, Margarita, Torben Iversen, and David Soskice. “Social Protection and the Formation of Skills: A Reinterpretation of the Welfare State.” Social Welfare in Global Context (1997): 134-56. The London School of Economics. Web.

HECKSCHER–OHLIN TRADE THEORY (n.d.): n. pag. Rochester Economics. Rochester University. Web. <http://www.econ.rochester.edu/people/jones/Palgrave_Jones_on_Heckscher_Ohlin.pdf&gt;.

Lee, Ho-Jin. “The EU-Korea Free Trade Agreement.” Brookings. The Brookings Institution, 12 Oct. 2010. Web. 02 June 2015. <http://www.brookings.edu/research/opinions/2010/10/korea-eu-lee&gt;.

“Most Favored Nation (MFN) Trading Status for China.” AFL-CIO. AFL-CIO, 22 May 1997. Web. 02 June 2015. <http://www.aflcio.org/Press-Room/Press-Releases/Most-Favored-Nation-MFN-Trading-Status-for-China&gt;.

Simon, Roger. “Clinton Pleads For China’s Trade Status.” Tribune Digital. Chicago Tribune, 04 June 1998. Web. 02 June 2015. <http://articles.chicagotribune.com/1998-06-04/news/9806040123_1_china-s-trade-status-mfn-status-south-asia&gt;.

 

[1] Heckscher-Olin, page 1.

[2] Estevez-Abe et al page 145.

[3] Ibid.

[4] Lee.

[5] Simon.

[6] AFL-CIO.

[7] Simon, lower part of page.

[8] Estevez-Abe, page 168.