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Workers are globalizing!
Saturday, 07 February 2009 05:09

Even workers are globalizing according to the International Monetary Fund.  What does this mean?  Is it a good thing?

What it means is that workers from the developed OECD countries are now in more direct competition with workers from emerging and developing countries in an increasingly global labour market.  Over the past two decades, political changes and economic reforms in China, India and the former communist countries have meant that their workforces are now involved in the global economy.  The effective global workforce has risen four times in this time, with most of this increase coming after 1990.  While most of the increased number of workers do not have higher education, the relative supply of high skilled workers has increased by about 50 per cent due not only to the advanced OECD countries, but also China.  (The effective global labour supply could more than double again by 2050.)

The globalization of the jobs market is basically the mirror of the globalisation of markets for goods and services.  Now that we have a global market for goods and services, the workers who produce these goods and services are also competitors.  This also means that all markets are substantially globalised -- financial, foreign exchange, goods and services, and now labour markets.

Competition in the global labour market is felt through three channels: trade in final goods; offshoring of the production of intermediate goods; and migration.  Trade has been the most important vector -- migration is very restricted, while offshoring is still quite limited.  Thanks mainly to China, the share of developing countries in OECD manufactured imports has doubled since the early 1990s, with skill-intensive products very much on the rise in recent years.  Similarly, OECD exports to developing countries has also been rising dramatically. 

What is the effect of the globalised labour market on workers in developed OECD countries?  In fact, since the early 1980s, the share of labour in national income has declined, especially in Europe and Japan.  Most of the decline can be attributed to the fall for unskilled workers.  The income share for skilled workers has been on the rise, particularly in Anglo-Saxon countries.  Not surprisingly, incomes in emerging economies, notably in Asia, have been catching up with those in the US.

Globalization is not however the only factor affacting labour markets over the past two decades.  Rapid technological progress, especially information and communications technology, has also had a big impact.  Broadly speaking, it is an important replacement for much unskilled labour, while it is often a complement to skilled labour.  

According to the IMF's statistical analysis, both labour globalization and technological progress have acted to reduce labour's share in national income, with the impact of technological progress being somewhat larger.  Each channel of labour globalisation (trade, offshoring and migration) played a relatively small role.  Technology was the main factor affecting the income share of the unskilled sector.  

As with all these types of analyses, you have to be careful with the details.  The IMF's analysis concerns workers' share of the GDP "pie".  It is very important to stress that, thanks to globalization, the size of this pie has been growing.

There is nothing particularly surprising in all this analysis.  It is just another contribution to the "don't blame it on globalization" literature. 

In this study, however, the IMF also looks at the effect of changes in labour market policies.  They estimate that changes in such policies have had a positive effect on labour's share of income in Anglo-Saxon countries, though a much more modest effect on average in Europe, particularly in large European countries where labour policies are estimated to have actually contributed to a decline in the labour share.  The decline in the so-called tax wedge in Anglo-Saxon countries, particularly the US, has in fact improved the labour share of income.  The tax wedge is the tax paid by employers on workers' income, and when it is reduced it means that workers can take home a larger share of their gross pay.    

The IMF concludes with its familiar chant about makng labour markets more flexible and adaptable, improving access to education and training, and ensuring adequate social protection for workers subject to structural adjustment. 

But, the most important conclusion is surely that pro-active tax policy can play an important role in protecting workers' share of national income.  And such tax policy would be much more useful than throwing money at agricultural protection or some of the zany schemes being cooked up to get our economies moving again. 

Reference:

IMF World Economic Outllok, April 2007 -- www.imf.org


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