Chukyo University Institute of Economics Discussion Paper Series November No.1104

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1 Chko Universit Institte of Economics Discssion Paper Series November No.4 Globalization and Economic Welfare: The Presence of an Unfair Gap between Skilled Workers Kenji Kondoh* Abstract B focsing on the nfair gap between skilled workers of niform qalit, where nionized older workers are emploed permanentl with higher wages, bt onger workers fail to occp permanent positions and are emploed as ncertain temporar staff on lower wages, we investigate the effects of the two tpes of globalization cased b the increasing immigration of foreign nskilled workers and trade liberalization. Under certain conditions, the immigration of nskilled workers might expand the income gap between the two tpes of skilled workers, bt it wold have a positive effect on national welfare. Ths, with adeqate income re-distribtion policies b the government, immigration cold be a welfare-improving polic. In contrast, althogh trade liberalization ma redce the wage gap between the two tpes of skilled workers, ever worker ma lose ot, and the welfare-improving possibilit of trade liberalization ma be relativel small. We also sggest that ever worker ma gain from an increase in the legal minimm wage. JEL Classification Nmbers: F6, F, J6 Kewords: temporar staff, nionization, international migration, trade liberalization Chko Universit School of Economics, Chko Universit, Nagoa , Japan. kkondo@mecl.chko-.ac.jp

2 . Introdction As a reslt of low economic growth in the recent decades, firms in developed contries that confront ncertaint in their ftre tend to hesitate to emplo workers on a permanent basis. Ths, it has gradall become increasingl difficlt for ong workers, who have jst gradated from a college or a niversit and have sfficient potential qalit to be skilled workers, to find sitable job opportnities. The aspire to be permanent emploees, bt man new gradates fail to find permanent positions. In sch a sitation, a nmber of ong skilled workers are emploed b staff agencies that sppl workers to companies on a temporar basis. Usall, the wages of these temporar workers are ver low and almost eqal to the legal minimm wage. oreover, these workers face the possibilit of nemploment becase the contract of temporar staff can be terminated easil and freqentl. Therefore, b following the wage arbitrage, some skilled ong workers, rather than taking p temporar assignments, choose to be emploed as nskilled workers with ver low competitive wages. As the edcational backgronds of these temporar staff are the same as those of the reglar staff, there is no difference in prodctivit between them. However, despite the fact that there is no qalit difference between them, there exists a serios gap among skilled (highl edcated workers. While the onger generations sffer, the older generations not onl occp permanent positions bt the are also sometimes nionized and throgh negotiation, the acqire a certain share of the profits b firms that are nder oligopolistic competition. The prevailing economic trend is globalization, and several kinds of ETAs and EPAs have been agreed pon between contries. Ths, there is not onl free trade of goods and services bt also free labor mobilit between contries, which implies introdcing nskilled foreign workers into the mainstream global econom. The main focs of or std is to investigate the economic effects of globalization on the existence of the nfair gap between the two tpes of skilled workers. Despite the important effect of labor market imperfections on the isse of immigration, theoretical stdies on the sbject have been limited. Schmidt et al. (994 and Fest and Thm ( have analzed immigration in nionized markets b focsing on skill differences. The demonstrate that immigration can be beneficial to the host contr owing to the complementarit of nskilled immigrants to skilled natives. Fest and Thm ( show that immigration enhances welfare if the wage elasticit of labor demand in the competitive sector is smaller than that in the nionized sectors. Or std is based on the std b Zhao and Kondoh (7, which analzes the economic effects of globalization nder nionization. Some workers in the manfactring indstr are nionized, and the obtain a wage premim, bt the other workers are non-nionized and gain onl a competitive wage. B adopting a similar approach to the one taken b Harris and Todaro (97, we extend the std of Zhao and Kondoh (7, which does not consider the recent nfair gap between generations, the possible nemploment of temporar staff, and the otflow of skilled workers to the nskilled labor market. Or findings abot the effects of globalization differ from Zhao and Kondoh (7 in some was (for instance, the possibilit of welfare improving the sitation throgh trade liberalization. We sggest that immigration cold be acceptable with an adeqate income-redistribtion polic; however, in the case of a poor income re-distribtion polic, trade liberalization might be better for the dissoltion of the nfair gap. oreover, we analze the effects of an increase in the legal minimm wage and show the possibilit that all the workers can gain from this facet. In Section, we present or model. Section 3 is devoted to the analsis. Conclding remarks are presented in Section 4.. The odel

3 . Consmers B adopting a similar approach to the one taken b Zhao and Kondoh (7, let s consider a host-contr econom consisting of the following two sectors: service sector (x and manfactring sector (, with as the nmeraire good. While perfect competition prevails in the manfactring indstr, the service sector is characterized b Cornot-Nash competition of a fixed nmber of n firms. We assme that a tpical consmer maximizes the following homothetic tilit fnction, cx c, where c x and c are respectivel the domestic consmption of goods x and, and is a positive constant. Utilit maximization sbject to the standard bdget constraint ields the following inverse demand fnction, c p( c, c. ( x ( cx B following the econom of Japan, which has a srpls of trade and deficit of service, we assme that the host contr is import competing in service; that is, it imports good x and exports good. This contr is small and takes the world price as given. However, it imposes a qota, q, on foreign imports. The jstification for this assmption might be that nder the WTO sstem, while tariffs are on the decline, non-tariff barriers still exist in varios forms, especiall in service trade, limiting trade flows. In order to maintain a balanced trade, we * mst also have c x q, c p q, where x and respectivel denote the total otpts of x * service and manfactring prodced in the host contr, and p is the world price.. anfactring Sector In the manfactring sector, the prodction of good ses nskilled labor and capital: ( L, K, where is otpt, and L and K are the inpts of nskilled labor and capital respectivel. We assme that perfect competition prevails in this sector, sch that labor is hired ntil the marginal prodct of labor is eqal to the competitive wage: w* ( L, K. ( Althogh some exporting manfactring indstries in Japan are characterized b oligopolistic competition, sch as the car indstr, we here focs on small firms that are sbcontracted b large firms. Owing to the keen competition with similar domestic and foreign firms and the disconted pament sall enforced b the parent companies, the small firms in this sector cannot afford to observe the legal criteria. This is wh we permit that the competitive wage of this sector w* cold be lower than the legal minimm wage w informall. oreover, we also assme that foreign nskilled workers are emploed in this sector. In realit, workers who cannot commnicate with domestic people ver well tend to be emploed b the manfactring indstr, and sch workers are not emploed b the service sector..3 Service Sector We assme that the workers emploed in the service sector of or model are relativel skilled workers with regard to commnication skills, and the have a bachelor s degree. In Japan, almost one-third of the domestic workers are emploed as temporar staff. In particlar, Eqation ( can be expressed as p p( L, L, L, q where p p L p L p ( x q, p p L p ( p* q, and p3 p q p[( x q ( p* p* q].

4 more than 6% of the workers serving in restarants or hotels are not permanent emploees. Arond 45% of the salespersons in the wholesale or retail sectors are also part time emploees. Reasonable examples of the x sector, in which some nionized permanent emploees and some temporar staff are both emploed, are Japanese-stle home secrit, parcel deliver, and home-moving services. The services are exported mainl to China and are widel accepted. In accordance with Zhao and Kondoh (7, we characterize this sector b mixed oligopol. There are n+m oligopolisticall competitive firms, n of which are nionized and the rest, m, are non-nionized. In eqilibrim, we seek a smmetric soltion; that is, we assme that all the non-nionized firms are identical, and the same applies to all nionized firms. The nmber of each tpe of firm is exogenos. In a tpical nionized firm, emploment and wages are determined b negotiation. All firms behave like Cornot-Nash oligopolists and replicate the actions of their competitors. Frther, the prodction of good (service x ses labor onl in a one-to-one ratio b a proper choice of nits: x L L, where x is the otpt, L is the aggregate labor inpt of nionized firms, and L is the aggregate labor inpt of non-nionized firms, respectivel. We need to note that there is no difference in the prodctivit between workers. A tpical non-nionized firm emplos workers who register with temporar staffing agencies. The labor contracts of sch workers are renewed periodicall, and whether or not the worker will contine to be emploed in the next period depends on random probabilit. The firm pas the legal minimm wage w to the temporar staff and maximizes profits: ( p w L. (3 All m non-nionized firms behave in the Cornot fashion, which reslts in the following FOCs: w p pl. (4 In contrast, the profit fnction of a tpical nionized firm is: ( p w L, (5 where w is the wage paid to nion members in a nionized firm, and L is the nion s emploment. In a nionized firm, all the domestic workers join in the nion. In other words, the nionized firm does not hire non-nionized domestic workers. A tpical nion has a Stone-Gear tpe tilit fnction (see ezzetti and Dinopolos, 99: ( w, L ( w w L. (6 It is interested in emploment as well as a nion wage premim above the legal minimm wage, and is the parameter which shows the nion preference. ( implies that nions prefer emploment to wage (wage to emploment. Wage and emploment in nionized firms are determined throgh negotiations. The soltion concept we adopt is Nash bargaining. The nion and the firm jointl choose emploment and wage to maximize the following Nash prodct: G( L, w, where denotes the negotiation power between the nion and firm. ( implies that the power of the nion (firm dominates that of firm (nion. The eqilibrim satisfies the following conditions: ( p w( Lp, (7a ( p w ( w w. (7b The labor contract of a worker with a non-nionized firm is temporar. Let s assme that it is renewed in each period, and whether the worker will contine to be emploed in the next period or not depends on random probabilit. The total nmber of workers who register with temporar staffing agencies is the sm of workers emploed b non-nionized firms, and 3

5 nemploed workers who are jst waiting for the next opportnit to be hired. Domestic workers can move between the two sectors freel. Ths, in eqilibrim, the expected income of a worker who registers with temporar staffing agencies shold be eqal to the income of workers in the competitive sector : L w* w, (8 L L where L denotes the nmber of nemploed workers who register with temporar staffing agencies. Finall, there is fll emploment and fll mobilit of labor among non-nionized firms between the two sectors: L L L L L, (9 where L is the labor endowment. If we sbstitte ( into (4, (7a and (7b, and sbstitte ( into (8, we have five eqations that determine the endogenos variables, L, L, L, L, and w. This completes the basic model set p. 3. The Analsis 3. International Immigration Let s first investigate the case of international immigration. In recent times, the majorit of immigrants to developed contries sch as Japan are nskilled workers who have poor commnication skills, and some of them are illegal immigrants. B considering this sitation, we assme that immigrants cannot be emploed b nionized firms in sector x. Let L denote the total nmber of immigrants. Under permanent immigration, sing (8, condition (9 becomes L L L L L L, (9 where we assme L L. B total differentiation, we derive the following comparative statistical reslts (see Appendix for detailed calclations nder the condition : dw, / ( if,, /, and /. / / Both conditions, and, cold be satisfied nder the following nmerical example: (, (,.6, which implies that labor nions prefer emploment to wage, and the negotiating power of the nion is less than that of the firm. The tilit of nionized workers will srel increase with international immigration becase of increasing emploment, L and wage rate, w. In contrast, the wage rate paid to the workers in the manfactring sector and the expected wage rate of temporar staff in the non-nionized service sector, w *, will decrease becase of increasing L. Therefore, regardless of the change in the relative price of two goods, p, the income gap between the two tpes of workers, the high-income nionized workers and the low-income workers, will increase after the introdction of foreign nskilled workers. oreover, the income of capital owners in the manfactring indstr and the profits of nionized and non-nionized firms will also increase. In terms of economic welfare, let s define the per-capita indirect tilit fnction as v v( p, I, where I px L L is the national income. The total differentiation ields v / v C ( L L, sing ( and the trade balance condition. Frther, we derive x 4

6 dv v dp v Cxdp pdx d v( px ( L L ( L L v pdx d ( I. L L The sign of ( cold be positive if and are held and I is sfficientl small to satisf pdx d I or L ( px [( pdx d ]. Ths, we ma conclde that international immigration cold improve the welfare of the host contr with sfficient poplation, L L. Ths, if the government adopts effective income distribtion policies and compensates the wage loss of low-income workers b imposing a tax on the income of nionized workers, capital owners, and nionized firms, the residents of this contr cold welcome the expansion of the immigration polic. Now, we can assert the following propositions: Proposition Consider that labor nions prefer emploment to wages, and the negotiation power of the nion is less than that of the firm to satisf conditions, and. Accordingl, an increase in immigration raises the nion wage bt redces the competitive wage and the expected wage of the temporar staff. It also increases the tilit of the nion, the profits of the nionized and non-nionized firms, and the rental of capital owners. Additionall, in case the labor endowment of the host contr is sfficientl large to satisf L ( px [( pdx d ], immigration increases national welfare. 3. Trade Liberalization Frther, we examine the effect of trade liberalization. Appendix shows that dw /, /, /, /, and / ( dw*. On the basis of these factors, the nion welfare will decline becase of the redced wage rate and emploment. The non-nionized workers will also lose from globalization becase the (expected wage for them, w *, will decrease. Frthermore, on the basis of (7b, the nions and the nionized firms alwas share the realized profits b :. It sbseqentl follows that an increase in q also redces the profits of the nionized firms. Capital owners in the manfactring sector are the onl ones who gain. On the basis of (A9 in the Appendix, the total otpt of service, x, will possibl decrease (increase nder the condition that and L( L (, L ( L, and is sfficientl small. In accordance with the former sb-section, whether economic welfare will increase or decrease depends on the change of otpts of both sectors as shown in (. dv v pdx d (. ( L L Althogh the total otpt of the manfactring sector increases, it is not clear whether this positive effect dominates the negative effect cased b the decreasing prodction of the service sector. We can onl assert that in case, L ( L, and is sfficientl small, economic welfare will increase after trade liberalization (increasing qota. The above reslts lead to the following proposition. Proposition Trade liberalization in the form of an increase in the import qota redces the income of ever worker. Emploment b the nionized firm, the nion tilit, and the profit of the nionized firms will also decrease. ( 5

7 The effects on economic welfare depend on certain parameters. The national welfare will increase in case the nion prefers wage to emploment, the negotiation power of the nion is sfficientl small, and the nmber of workers emploed b the nionized firms is mch larger than that of those emploed b non-nionized firms in the service sector. 3.3 Increase in Legal inimm Wage In or model, the legal minimm wage is paid to the temporar staff, and the competitive wage of nskilled workers emploed in the manfactring sector is less than the minimm wage, becase of the informal natre of the labor market. Government can onl control the legal minimm wage bt cannot control the competitive wage directl. If the negotiation power of the nions, the legal minimm wage rate w, and the capital endowment K are all sfficientl small, we can then assert the possibilit dw / dw, / dw, / dw, / dw, and / dw ( dw*/ dw. These reslts impl that an increase in the legal minimm wage will have a positive effect on all other workers, nskilled workers in the manfactring sector, and nionized workers. This is becase nions prefer both wage gap and emploment, and an increase in the legal minimm wage redces nion tilit. Sbseqentl, the nions tend to increase their premim wage. If the nions scceed in expanding the wage gap more than earlier, the nions also tend to increase their emploment. This effect ma lead to a decrease in the emploment of temporar staff. Accordingl, the total nmber of workers emploed in the manfactring sector will decrease, the wage rate of this sector will increase, and therefore, on the basis of (8, the nmber of nemploed temporar staff will also decrease. The next proposition is based on the above reslts: Proposition 3 Under certain conditions, an increase in the legal minimm wage rate applied to the emploed temporar staff in the service sector might have a positive effect on the income of ever worker. 4. Conclding Remarks We revise the Zhao and Kondoh (7 model b focsing on the nfair gap between the skilled workers of niform qalit, that is, between the nionized older workers emploed permanentl and ong temporar staff with lower wages. In particlar, we investigate the economic effects of the trend of globalization cased b the increasing immigration of foreign nskilled workers and trade liberalization. Under certain conditions, the immigration of nskilled workers might expand the income gap between the two tpes of skilled workers, bt it wold have a positive effect on the national welfare. Ths, with adeqate income redistribtion policies b the government, everbod cold benefit throgh the introdction of foreign nskilled workers. In contrast, trade liberalization redces the expected wage of ever worker, bt the income gap between the two tpes of skilled workers ma decrease. There exists a small possibilit that trade liberalization ma have a positive effect on the national welfare. Additionall, nder certain conditions, an increase in the legal minimm wage ma have a positive effect on ever worker s income. The above reslts depend on the straightforward setting of or model. The consideration of other sitations, sch as the opposite trade pattern, the immigration of skilled workers, and the temporar immigration of nskilled workers, are sbjects for ftre examination. Detail calclation report is available pon reqest. 6

8 Appendix Totall differentiating (7b, (7a, (4, (9 and (8, sing inverse demand (, ields the following matrix. ( p p p dw ( p A A B C p C D L wl ( L L ( L L p3 E dw F. (A L L L L ( ( x q where A pl ( p p[ ], and ( x q L ( ( x q B [ p L ( p] p[ ], ( x q( p* q ( x q L ( x q L C p pl p[ ], D [ p p L ] p[ ], ( x q ( x q( p* q ( ( x q L p* E [ p3 L ( p3] p[ ][ ], x q ( x q p* q x q L p* F [ p3 L p3] p[ ][ ]. x q ( x q p* q The determinant of the LHS matrix of (A is, wl L [ ][( p ( ( A C p ] [( p D ( p C] ( L L ( L L wl ( L L [( p ( B D ( p p ]. The sign of is negative if which exclde the nrealistic case that satisf both the following two conditions; nion does not prefer wage premim of themselves to introdcing new nion members and the negotiation power of nionized firm is relativel weaker than that of nion. Straightforward calclations ield: dw wl [ p p{ p[ L L ( ( x q] ( L L (A p [ L L ( x q(3 ]}], wl p x q L ( L L ( ( * x q p q [( ( ( ] [ { }] if, (A3 7

9 wl pd, (A4 ( ( L L { [( p ( A C( p ] L [( p D ( p C ]} if, ( L L 8 (A5 wl [ { p ( ( p( A C}] if, ( L L (A6 dw wl { p p3[ ( L L ]}, (A7 wl wl L { pe[ ] F p L [ ]}, ( L L ( L L (A8 wl wl {( pf[ ] F p L[ ]}, ( L L ( L L (A9 L { F p L [ ] ( L L (A p* ( x q( L ( L wl p p[ ][ ][ ]}, x q p* q x q ( L L L { F[( p A ( ] ( L L wl p [ E ( F] [ ]}. ( L L (A where the sign of (A9 is negative (which implies dx if and L ( L.While the sign of (A9 cold be positive (which implies dx if the negotiation power of nion,, is sfficientl small (close to nll, and L ( L. From (8, (A8 and (A, we also can conclde that. References Boeri, T., G.H. Hanson, and B. ccormick, Immigration Polic and the Welfare State--A Report for the Fondazione Rodolfo Debenedetti, Oxford Universit Press,. Borjas, Gorge J., Heaven's Door: Immigration Polic and the American Econom, Princeton Universit Press, 999. Chao, C.C. and Y, E.S.H., Immigration and Welfare for the Host Econom with Imperfect Competition, Jornal of Regional Science. a ; 4(: Djajic, S., International igration, Remittances and Welfare in a Dependent Econom. Jornal of Development Economics, 986, (: Ethier, W. J., International Trade and Labor igration, American Economic Review 75, 985, Filer, R., The effect of immigrant arrival on migrator patterns of native workers, in G. Borjas and R. Freeman, eds., Immigration and the Work Force, The Universit of Chicago Press, Chicago and London, 99. Fest, C. and Thm,., Welfare Effects of Immigration in a Dal Labor arket. Regional Science and Urban Economics. September ; 3(5:

10 Fest, C. and Thm,., Immigration and Skill Formation in Unionised Labor. Eropean Jornal of Political Econom. September ; 7(3: Kondoh, K., Permanent igrants and Cross-Border Workers: The Effects on the Host Contr, Jornal of Regional Science 38, 3, 999, ccormick, B. and Wahba, J., Overseas Emploment and Remittances to a Dal Econom, Economic Jornal. April ; (463: ezzetti, C. and Dinopolos, E., Domestic Unionization and Import Competition, Jornal of International Economics 3, /, (99, 79-. Qinlan,., and Lever, T. C., From Labor arket Exclsion to Indstrial Solidarit: Astralian Trade Union Responses to Asian Workers, Cambridge Jornal of Economics. Jne 99;4(: Schmidt, C.., Stilz, A., and Zimmermann, K. F., ass igration, Unions, and Government Intervention. Jornal of Pblic Economics, 994, 55(: 85-. Zhao, L., Qantitative Trade Restrictions in Unionized Economies, Review of International Economics, 9(,, Zhao, L. and Kondoh, K., Temporar and Permanent Immigration nder Unionization, Review of Development Economics, (, 7, Zimmermann, K. F., Tackling the Eropean igration Problems, Jornal of Economic Perspectives 9(, 995,

Volume 31, Issue 4. Emigration promotion and urban unemployment

Volume 31, Issue 4. Emigration promotion and urban unemployment Volme 3, Isse 4 Emigration promotion and rban nemployment Shigemi Yabchi Aichi University Abstract Unemployment is present in many developing contries. Ths, the government of a contry that sffers from