Elaborating national employment policies

Virtually all trade development policies influence the relative price of labour. Inward-oriented trade strategies tend to protect capital-intensive industries at the expense of labour-intensive industries; this increases the demand for capital relative to labour and raises the rental on capital relative to the price of labour. But, at the same time, inward-oriented trade strategies may have effects that work in the opposite direction. Overvaluation of the exchange rate, common in inward-oriented economies, reduces the cost of imported capital goods and therefore raises wages in relation to the rental on capital. Interest rate controls cut the cost of capital to some firms; so do tax holidays, tax discounts, and accelerated depreciation. Minimum wage legislation, payroll taxation, and high public sector pay scales raise the cost of labour. Thus, policies on finance, labour, and taxes tend to work in the same direction: they raise wages relative to the cost of capital and therefore depress employment. A study based on a seventy-country sample showed that if the level of wages increased by, say, 10% relative to the rental rate of capital, the proportion of labour employed would fall on average by 10% relative to the amount of capital.