Trade, value chains and labor markets in advanced economies

Trade is a major source of employment. Nevertheless, trade has recently been caught in the crossfire in discussions around the decline of manufacturing employment and the polarization of labor markets in advanced economies. In this chapter we examine what the academic literature has to say on the relationship between trade and labor markets, with a specific focus on studies with a value chain perspective. We find that trade has only modest effects on aggregate employment and is unlikely to have been a major contributor to the decline of manufacturing. However, the effects vary considerably across regions and individuals with different skill levels. This implies that policy has a central role to play in making sure that the gains from trade are shared evenly. Our findings highlight that a value chain perspective is important for assessing the impact of trade on labor markets. The emergence of value chains has strengthened linkages between sectors, magnified trade’s impact on skill demand and requires novel trade statistics. Ignoring this leads to a biased view of trade and overestimates its role in the decline of manufacturing employment.