2. A REVIEW OF THE GLOBALIZATION LITERATURE
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2002). Artuc, Chaudhuri, and McLaren (2007) estimate the mean intersectoral moving costs faced by a worker by using the U.S. Census Bureau’s Current Population Surveys 1975–2000. In equilibrium, the moving cost is found to be about 13 times the average annual wage. A model simulation of the impact of trade liberalization on intersectoral labor movement indicates that a 40 percent reduction in manufacturing import tariffs reduces manufacturing share of employment from 25 percent at the beginning of the period to 16 percent over eight years. Manufacturing wages decline 22 percent immediately following liberalization, while steady-state manufacturing wages decline only 2.45 percent. Despite the decline in the manufacturing wage, all workers see an increase in their expected discounted lifetime utility as a consequence of the liberalization. While it is true that the manufacturing wage declines, wages in other sectors rise. All workers have a positive probability that they will move to one of those higher paying jobs.
Trade and Wages Globalization may affect both absolute (or average) wage levels and relative wages between different groups. Globalization may affect absolute wages by inducing specialization that increases productivity, and relative wages by altering relative factor demands. For consumers, globalization (such as falling trade barriers) reduces prices, thus increasing real wages and purchasing power. Most studies, however, focus on the effects of globalization on relative wages because a vibrant debate still revolves around the topic.2
TRADE AND ABSOLUTE WAGES Frankel and Romer (1999) and Noguer and Siscart (2005) find that countries that trade more have higher GDP per capita. Because their analyses are based on cross-section data, they assume that all countries follow similar development paths, and do not imply that trade liberalization (or changes in globalization over time) will necessarily produce higher wages. To address changes over time, Rama (2003) uses annual wage data from Freeman and Oostendorp (2000, 2001) to assess the net impact of trade openness on wages. Three different measures of openness are employed: (i) ratio of trade to GDP; (ii) openness policy as indicated by low tariffs, limited nontrade barriers, absence of marketing boards, no central planning, and low black-market foreign exchange premiums; and (iii) ratio of FDI to GDP. Other control variables in the regression model include wage rate, GDP per capita, country, year, occupation, and measures of political and economic liberty. The results indicate a negative and statistically significant effect of trade and trade policy on wages, while openness to FDI is found to be correlated with higher wages. A 20 percentage point increase in the ratio of trade to GDP leads to a 5–6 percent decline in wages. By contrast, a 1 percentage point increase in the ratio of FDI to GDP is correlated with a 1 percent increase in wages. FDI also appears to be an important determinant of the wage premium paid to skilled workers, with a 1 percentage point increase in the ratio of FDI to GDP correlated with a 5 percentage point increase in the return to a year of education.3 Trade share of GDP, however, appears to have little impact on wage dispersion. The short-run effects of liberalization may include adjustment costs and, therefore, differ from the long-run effects. To consider this possibility, Rama (2003) introduces long