Global Value Chains and Relative Labour Demand: A Geometric Synthesis of Neoclassical Trade Models

Abstract

Technological advancements and reductions in trade tariffs have made it increasingly profitable for firms to separate their production into individual tasks, creating global value chains (GVCs). The theoretical literature on the distributional effects of GVCs is large, but ambiguous. Since the early conception of Jones' general equilibrium model in 1965, there seems to have been a tendency to repackage (part of) this model, generating apparent conflicts and implicit overlaps. This paper goes back to the basics by using the dual nature of the production model in Jones to provide a geometric exposition of the main channels by which GVCs can affect the relative demand for skilled labour. The explanatory power of this figure is vast. First, it can synthesize the ambiguous literature in a coherent and intuitive framework and show how subtle modelling differences can have widespread effects on key predictions. Second, it can serve as a conceptual framework and as a guide to empirical analysis. Third, it can be used as an illustration of key models explaining global value chains. Ultimately, the proposed figure can be used as a pedagogical tool for policy makers and (under)graduate students alike, without the need to understand complex algebra.

Global value chains and labour markets – simultaneous analysis of wages and employment

“…International production fragmentation has been analysed from the perspective of trade in intermediates (Feenstra & Hanson, 1996;Yeats, 2001), foreign direct investment (Brainard, 1997;Ethier & Markusen, 1996), production fragmentation (Arndt & Kierzkowski, 2001;Jones & Kierzkowski, 2018), globalisation's second unbundling (in which Baldwin, 2006, notes the role of the ICT revolution), trade in tasks (Grossman & Rossi-Hansberg, 2008), and models of sequential production (Escaith, 2014), among others. Franssen (2019) correctly suggests the theoretical literature on the distributional effects of GVCs is abundant but ambiguous. He shows diverse predictions from alternative theoretical models that consider the effect of demand for unskilled labour to be influenced by offshoring of low-skill tasks.…”

How Digital Technology Affects Working Conditions in Globally Fragmented Production Chains: Evidence from Europe

“…Value chains simply cannot be ignored: half of all world trade takes place within GVCs (World Bank, 2020) and approximately one-fourth of European manufacturing production depends on intermediate products produced in other countries (Parteka and Wolszczak-Derlacz, 2020). The labour market implications of globalised production have been widely examined, but almost always in order to quantify the effects on wages (Baumgarten et al, 2013;Ebenstein et al, 2014;Shen and Silva, 2018;Geishecker and Görg, 2013;Parteka and Wolszczak-Derlacz 2019;Cardoso et al, 2021;Szymczak and Wolszczak-Derlacz, 2021), jobs and labour demand (Goos et al, 2014;Franssen, 2019;Autor et al, 2014;Egger et al, 2015;Hummels et al, 2018;Szymczak and Wolszczak-Derlacz, 2021), or productivity (Amador and Cabral, 2015). Studies on the social aspects of work within GVCs are less common (Gimet et al 2015;Milberg and Winkler, 2011;Nikulin et al, 2021), and in many cases deal with problems typical of the developing countries (Delautre et al, 2021;Lee et al, 2016;Nadvi et al, 2004;Rossi, 2013).…”

Wage response to global production links: evidence for workers from 28 European countries (2005–2014)

“…On the theoretical plane our paper is at the crossroads between the literature on the effects of offshoring on domestic workers and that on sequential production, which can be adopted to GVC analysis. 11 As recently described by Franssen (2019), the theoretical literature on the distributional effects of GVC is abundant but ambiguous, and 'the hypothesized effects are highly dependent on the microeconomic foundations of the model chosen' (Feenstra 2010, p. 3). The conceptualisation of offshoring through trade-in-tasks has become a widely accepted reference point in the literature on production fragmentation.…”