International trade and unemployment: towards an investigation of the Swiss case

The relationship between international trade and employment has always been controversial. Trade economists have traditionally emphasized the efficiency-enhancing effects of international trade with no impact on total employment, at least in the medium and long term. Politicians and members of governments, in contrast, typically believe in an employment-increasing effect of international trade and often point to the numbers of jobs created by rising exports.¹ In the eyes of the public, however, international trade entails the danger of job destruction, particularly through increased imports. Trade economists agree that international trade may have distributional effects within countries. But they typically identify these effects in terms of changing factor prices: Low-skilled labour may, for example, lose ground—relatively and absolutely—in a high-income country as a result of international trade with (low-skilled) labour-abundant countries such as China or India.

In this paper, we investigate whether international trade is indeed linked to the likelihood of becoming unemployed. The focus on unemployment is motivated by our observation that the Swiss unemployment rate between low-skilled labour and high-skilled labour increased faster than that of any other OECD country between 1991 and 2014, with virtually no change in the relative wage rate between the same two groups of people. We use a representative panel data set for employees in the Swiss manufacturing sector, covering the period from 1991 to 2008, and link it to international trade data. We control for a number of individual characteristics, particularly regarding skills, age and experience, as well as industry properties. The analysis indicates that, for the Swiss economy, rising or high levels of imports do not seem to be a driving force behind the probability of becoming unemployed. Individual characteristics such as a short length of tenure, part-time employment, and low skills are, however, confirmed to be important factors that positively affect the individual’s risk of becoming unemployed.

Thus, the paper adds to the rapidly expanding literature on whether international trade is an important cause of the increase in the wage and unemployment gaps between skilled and unskilled labour that have been observed in the USA and some other countries since the 1980s.² We know since Stolper and Samuelson (1941) and, more generally, since Jones (1965) that trade liberalization tends to have a strong negative impact on some real factor prices and, if these are inflexible or search costs are involved, also on factor market clearing, as shown by Davis (1998b), Davidson et al. (1999), and Egger and Kreickemeier (2008). Moreover, Feenstra and Hanson (2003) argue that the effects from trade in intermediate inputs may be similar to those caused by skill-biased technological change which is often made responsible for the wage gap in the US economy. Autor et al. (2013) found significant negative labour-market effects on the US economy of international trade between the USA and China and conclude: “Rising imports cause higher unemployment, lower labor force participation, and reduced wages in local labor markets that house import-competing manufacturing industries” (p. 2121).

Recent trade models, which introduce some labour market frictions, as used by Brecher and Chen (2010), Davis and Harrigan (2011), Helpman and Itskhoki (2010), Helpman et al. (2010), Larch and Lechthaler (2011), Mitra and Ranjan (2010), or Ranjan (2012), imply that relative unemployment between different types of labour may be affected by trade liberalization in a variety of ways. Moreover, these models come to the conclusion that international trade may also affect the overall unemployment level in an economy—positively or negatively.³ In empirical analyses, a negative effect of trade on overall unemployment is found by Felbermayr et al. (2011) and by Gozgor (2014) in cross-country analyses, by Hasan et al. (2012) for India and by Francis and Zheng (2011) for NAFTA.⁴ Chusseau et al. (2010)—in a cross-country analysis—and Horgos (2012)—for Germany—show that in the case of inflexible factor prices an increase in the relative unemployment rate between skilled and unskilled labour can to some extent be linked to trade—which the former call an “inequality-unemployment trade-off”. Fugazza et al. (2014) find a positive relationship between trade and unemployment in a panel of 97 countries if countries have “a comparative advantage in sectors that have high labour market frictions” (p. 1).

Compared to the existing literature, our empirical investigation is of particular interest for three reasons. First, it focuses on a small country whose international trade reflects a large share of its domestic output. The Krugman (2000) critique that a country’s trade volume is typically too small to explain effects on different types of labour hardly applies in this case (or at least to a much lesser extent). Second, our paper’s emphasis is on the unemployment rate, and not on wages as underlined by the majority of empirical research studies.⁵ This focus is in line with the recent shift in research interest among trade theorists and labour-market economists as well as with the stylized facts applying to the Swiss economy. Finally, we add to the limited literature on Switzerland in this field. The relationship between international trade and unemployment has, to our knowledge, not been analysed to date for the Swiss case.⁶

The remainder of the paper is as follows. The “Background” section presents stylized facts that explain our research strategy. The “Methods” section briefly describes our research methodology. The “Results and discussion” section presents the main results of the econometric analysis. The “Conclusions” section concludes.

Past research has been motivated by an inquiry into the impact of international trade on relative wages. Feenstra (2010, pp. 10), for example, describes and discusses the development of the wages of “nonproduction” relative to “production” workers in US manufacturing from 1958 to 2006. If we interpret this ratio as the relative wage rate of high-skilled to low-skilled labour, the data clearly shows that the relative wages of unskilled labour fell considerably and constantly from 1986 to 2000. This observation has been the basis for the expanding literature on trade and the wage gap in the USA that also sparked our research interest with its focus on Switzerland.

Such a development is, however, not observable for Switzerland. Using Swiss labour market panel data (Swiss Labor Force Statistic, SLFS) and the UNESCO skill classification scheme (International Standard Classification of Education, ISCED-97),⁷ we calculated both the median gross wage rate of high-skilled (W_H) and low-skilled (W_L) labour, and the unemployment rate for the same two groups, i.e. U_H and U_L, for the period 1991 to 2014. Figure 1 shows that, over this period, the U_L/U_H rose with a compounded annual growth rate (CAGR) of 2%, whilst the W_H/W_L remained roughly constant with a CAGR of − 0.3%. Thus, Fig. 1 serves as a motivation to study a possible relationship between international trade and (changes in) the relative unemployment of low-skilled and high-skilled labour in the Swiss case.

A comparison among 21 OECD countries implies that there is no other country in which U_L/U_H has grown as fast as in Switzerland from 1991 to 2014.⁸ Figure 2 shows a CAGR of 4.8% of this ratio from 1991 to 2014 (top panel). It reveals that other countries such as South Korea or Germany also experienced a large rise in this ratio, whereas countries like the Netherlands or Belgium but also the USA or Canada demonstrate a decrease of the relative unemployment of low-skilled labour. Absolute numbers in the OECD data indicate that the Swiss U_L increased from 1.2% (1991) to 8.8% (2014), whereas U_H increased to a much smaller extent over this period (from 1.3 to 3.2%). Note, however, that the absolute value of the relative unemployment rate in Switzerland (2.7) is not extremely high, but rather puts the country in the middle of the reported OECD countries as shown in Fig. 2 (bottom panel). Given the strong and yet unbroken trend in the Swiss relative unemployment rate, it is of highest interest to assess whether trade may be a driving force of this development.⁹

Trade theory stresses the importance of international trade in improving an economy’s allocation of resources, and not the creation of additional jobs. In a standard trade model, there is no expected link between trade liberalization and the total number of jobs in an economy.¹⁰ The argument trade economists traditionally have put forward is that whilst more trade leads to some jobs being destroyed in the import-competing sector of an economy, new jobs are simultaneously being generated in the export sector.

An increase in unemployment is, however, compatible with the traditional trade theory if we, for example, extend a Heckscher-Ohlin type model to allow for some factor price inflexibility as shown by Davis (1998b) or, adding trade in intermediate inputs, by Egger and Kreickemeier (2008). The reason is that trade typically leads to a decrease in the relative demand for low-skilled labour in a (human) capital-rich country. If the induced fall of the price of low-skilled labour—predicted by the Stolper Samuelson Theorem—is prevented by labour market rigidities, unemployment for low-skilled labour tends to rise with trade liberalization.

Recent trade models expanded in this direction allowing for a number of labour market frictions and/or using intra-industry trade models based on heterogeneous firms and job-specific rents. It turns out that, in these set-ups, trade liberalization may indeed raise unemployment of particular types of labour and affect overall unemployment in an economy. In Brecher and Chen (2010), for example, the unemployment rates of low- and high-skilled labour “often move in opposite directions” (p. 990), whereas the change of aggregate unemployment is ambiguous. Davis and Harrigan (2011) argue that, in their model, trade liberalization may destroy a considerable share of highly paid jobs without, however, necessarily affecting overall unemployment. Helpman and Itskhoki (2010, p. 1100) find the surprising result that “[T]he opening to trade raises a country’s rate of unemployment if its relative labour market frictions in the differentiated sector are low.” And Hasan et al. (2012, p. 269) come, based on their empirical study of India, to the conclusion: “Moreover, our industry-level analysis indicates that workers in industries experiencing greater reductions in trade protection were less likely to become unemployed, especially in net exporting industries.”¹¹

The focus of our paper is empirical. We seek to explain the employment status of individuals over time, i.e. whether they become unemployed or not, by changes and levels of imports and exports, controlling for various individual characteristics and industry factors. The explained variable (i.e. the individual’s status, y _i ) is qualitative in nature and takes a value of 1 if an individual becomes unemployed in a certain year and 0 otherwise. The explanatory variables will be qualitative or quantitative as will be made more precise in the “Results and discussion” section. The econometric analysis of the relationship between the two is largely based on the linear probability model (OLS) that includes year and industry fixed effects and, for some specifications, individual fixed effects. We use this model as coefficients will be easier to interpret, but we also report the results of the analysis based on the logit model. They turn out to be qualitatively the same.

We base our analysis on representative industry-panel data for the years 1991 to 2008. During this period, Switzerland established a number of bilateral agreements with trading partners—including the European Union (EU). Moreover, mutual trade liberalization between Switzerland and other countries also occurred through new membership of countries to the World Trade Organization (WTO), the EU and the European Free Trade Association (EFTA).¹² All of this implies pressure and adjustments that are typical for trade liberalizations. The question we now seek to answer is whether international trade indeed had a significant impact on the probability of (particularly low-skilled) individuals to become unemployed. If this is the case, international trade could be one reason for the increase of the relative unemployment rate for low-skilled labour described in the “Background” section.

Using micro data on individuals’ characteristics, we intend to assess whether an individual, who becomes unemployed, does so because of his or her particular exposure to international trade, controlling—amongst others—for skills. We present detailed summary statistics of the underlying data in the “The data” section and then run regressions of the change in the individual employment status on individuals’ characteristics and the trade variables in the “Changes in employment status, individual characteristics and trade” section. The “Refinement of the trade variables and inclusion of individual fixed effects” section uses a number of refined trade variables and includes individual fixed effects. The “Sensitivity analyses” section concludes with some sensitivity analyses.

This paper has been sparked by the omnipresent public concern in many industrial countries that international trade through specialization and outsourcing may cause income losses and unemployment, particularly for low-skilled labour. The striking increase in the Swiss unemployment rate of low-skilled relative to high-skilled labour from 1991 to 2014—with virtually no changes of relative wages—motivated us to focus our research on the relationship between international trade and unemployment for Switzerland.

Our assessment of the Swiss case does not confirm the public concerns. The econometric analysis of a data set of roughly 30,000 workers in the Swiss manufacturing sector from 1991 to 2008, which we link with the Swiss foreign trade statistics, does not, overall, support the presumption that an increase in imports has a statistically significant (and positive) effect on the probability of individuals of becoming unemployed, irrespective of their skills. Thus, we seem to be left with other well-established factors such as the level of skills, temporary employment or the length of tenure to explain the individuals’ risk of unemployment. The startling rise in the relative unemployment rate of low-skilled labour and, at the same time, the somewhat comforting constant relative wage rate of low-skilled labour in Switzerland from 1991 to 2014 still remains to be explained. Obvious candidates to look at more carefully would, in our view, be a skill-biased technological change for the relative unemployment rate and the compositional change in immigration for the relative wage rate.²¹

Our investigation therefore only offers an initial basis for a more profound analysis of the labour market effects of trade or, more generally, of globalization for Switzerland. First, the fact that we find a weak (albeit small) positive relationship between low-skilled individuals working in industries characterized by a relatively high level of imports (particularly from the South) and the probability of their becoming unemployed may indicate something that we are not able to identify, given the limited statistical power of our data set which includes only a relatively small number of individuals who became unemployed. Second, we use exports as a control variable for (changes in) demand, because increasing imports have different effects on employment if they are combined with rising exports. This presents no problem as long as the domestic markets remain relatively small, which may, even in a small country such as Switzerland, not always be the case. If compatible data were available, a more sophisticated ratio could be used such as the import penetration ratio proposed by Autor et al. (2014) for the US industries.

Third, the fact that the individuals’ characteristics could only be linked to the two-digit SIC industry level, may even out a large amount of variation within industries: An individual’s employment status may be affected by imports on a sub-industry level, which might remain unobserved on the aggregated industry level. Also, and related to this, individuals employed in large multiproduct firms may be linked to an industry which is not really relevant to their actual occupation. Thus, an analysis based on more disaggregated, possibly even firm- or establishment-level, data may challenge our results.

On the other hand, this paper’s lack of findings in support of a strong positive relationship between import competition and the risk of unemployment could also be a consequence of the relatively low unemployment rate in Switzerland and the alleged high degree of flexibility in the Swiss labour market. If individuals lose their job because of import competition, but immediately find a new one, they never become unemployed. In this regard, it is interesting to note that our analysis of six announced mass-layoff cases in Swiss manufacturing due to globalization between 2001 and 2006 revealed exactly this situation: Only one quarter of the displaced workers were, in the end, dismissed by their companies and thus became, at least for a short term, unemployed (see Wyss, 2010). The others swiftly found a new job in the same or in another company or industry.