The effects of trade and foreign direct investment on employment and relative wages

Recent developments in the international economy have given rise to concern about the effects of international trade and foreign direct investment on domestic employment and wages. These concerns include fears that: jobs are being "siphoned out" of many highly industrialised countries by catching up economies; the high share of comparatively low skill-intensive products in the imports from catching up economies may be contributing to the decline of wages of workers in advanced industrialised countries with high school or lower levels of education relative to those who have attended college; and that high rates of foreign direct investment by companies from advanced industrial countries will exacerbate these tendencies.This paper considers the economic evidence that has given rise to these various concerns (Part I); explores the relationships suggested by economic analysis between changes in trade and foreign direct investment and changes in employment and wages (Part II); examines the results of recent studies of the employment impact of trade and foreign direct investment (Part III); evaluates in terms of standard trade theory the empirical evidence concerning the role of trade and other factors in accounting for the observed changes in relative wages in recent years (Part IV); and concludes with a summary and a brief discussion of various policy options being considered to meet the concerns of policy-makers (Part V). The evidence indicates that domestic factors have generally been much more important in accounting for changes in total employment than changes in demand for imports. The employment creating effects of increased exports usually dominated the employment-displacing effects of increased imports. However increased imports were a major factor in accounting for employment declines in specific low-technology industries. Further studies are needed before the questions concerning the employment effects of foreign direct investment and the effects of trade on income distribution can be answered with certainty.