Trade and Worker Deskilling

Abstract

This paper presents new evidence on international trade and worker outcomes. It examines a big world event that produced an unprecedentedly large shock to the UK exchange rate. In the 24 hours in June 2016 during which the UK electorate unexpectedly voted to leave the European Union, the value of sterling plummeted. It recorded the biggest depreciation that has occurred in any of the world's four major currencies since the collapse of Bretton Woods. Exploiting this variation, the paper studies the impact of trade on wages and worker training. Wages and training fell for workers employed in sectors where the intermediate import price rose by more as a consequence of the sterling depreciation. Calibrating the estimated wage elasticity with respect to intermediate import prices to theory uncovers evidence of a production complementarity between workers and intermediate imports. This provides new direct evidence that, in the modern world of global value chains, it is changes in the cost of intermediate imports that act as a driver of the impact of globalization on worker welfare. The episode studied and the findings add to widely expressed, growing concerns about poor productivity performance relating to skills and to patterns of real wage stagnation that are plaguing contemporary labour markets.

The Global Impact of Brexit Uncertainty

“…4 Papers documenting a negative impact of Brexit on UK investments, employment, wages, trade, lending, and competition include Born et al (2019); Berg et al (2019); Van Reenen (2016); Sampson (2017);Breinlich et al (2018); Davies and Studnicka (2018); Dhingra et al (2017); Graziano et al (2018); Garetto et al (2019); Costa et al (2019); McGrattan and Waddle (2017); Steinberg (2019). 5 Campello et al (2018) document the investment and hiring e↵ects of Brexit on a sample of US firms exposed to the UK economy.…”

Outsourcing: A Case of Shared Mental Models in Conflict

“…Davidson, et al (2017) studied the skill mix demand in Sweden at the firm level and found that as firms become more globalized they tend to demand an increasing share of high-skilled occupations, supporting the geographic division of labor. Exploiting a natural experiment, the exchange rate shock caused by Brexit, Costa et al (2019) find that the falling value of the pound harmed, rather than helped, the UK's domestic workers and exporters, even leading to significant deskilling through reductions in training investments. They found that intermediate imports are complements to a significant number of domestic workers and exporters.…”

The trade impact of the UK’s exit from the EU Single Market

“…This could suggest that firms have responded to demand by hiring rather than investing. Businesses have also absorbed some of the increased costs of imports by lowering worker wages and investment in training (Costa et al, 2019).…”