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GLOBALIZATION, WAGES, AND THE QUALITY OF JOBS: FIVE COUNTRY STUDIES
where y represents working conditions (employment, wages, or other facets of working conditions), X represents a vector of globalization variables (such as imports, exports, trade barriers, or FDI) for an individual identifier (worker, firm, or industry) i at time t. The error term is a composite term that may include specific effects for each group or time period. There are two general concerns with the above specification: time frame and the presence of fixed effects. Because of possible fixed effects, equation (3.1) should be estimated in differences: Δyit a b Δ Xit eit .
(3.2)
Differencing removes the individual-specific fixed effects that are often correlated with unobserved characteristics. The second issue is the time frame over which to difference the data. For short-run studies, the difference should be over the shortest period possible. For medium-run studies, a three-to-five-year difference is often appropriate. At this point, there will be many particular estimation issues that relate to the specific combination of variables chosen. Once these are addressed, the results can be combined with the descriptive analysis on the nature of globalization to complete the analysis of how globalization affects working conditions in a given country. Estimation Issues
While each country study faces different estimation issues depending on the data and approach used, several key issues affect all studies. The first is endogeneity, which is particularly relevant for studies of FDI and wages. Wages, either high (representing qualified workers) or low (representing potential labor cost savings) may attract FDI; therefore, attempts to assess the relationship between globalization and wages without accounting for endogeneity will generate inaccurate conclusions. This highlights the importance of including the time dimension in a study. Other possible variables that could be driving a revealed relationship must be also controlled for. The example of NAFTA and the peso crisis above illustrates this point. Although studies often define globalization differently and test different outcomes, several factors are common among them. One is the inclusion of year dummies or time trends (or both); a second is the inclusion of either country or industry-level fixed effects. The studies mentioned throughout this chapter have some method to account for time and country or industry effects. Many also isolate effects by gender, industry, economic classification, or country.
Technical Annex: Empirical Methodology This section briefly describes some of the empirical methods mentioned in this chapter or used in the country studies in the following chapters. The goal of this annex is to provide background and support for using the different empirical approaches.
INTERINDUSTRY WAGE DIFFERENTIALS Given the frequent focus on interindustry wage differentials in the literature, this section provides references, context, and methodology to help researchers implement studies focusing on industry-specific wages.