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Globalisation and the Labour Market

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3. Globalisation and the Labour Market

The advance of the globalisation has lead to a vigorous debate in economics about the effect of trade liberalisation on labour markets. As the literature is vast, I want to concentrate today on the debate about the effects of trade liberalisation on wages and employment.

The advocates of trade liberalisation and globalisation usually argue about the "efficiency gains", "gains from trade", "comparative advantage" and the elimination of "dead weight losses". However, there is little reference made to the income distribution consequences of policy advice based on the international trade models, nor is there much attention paid to the adjustment process in labour markets resulting from trade policy.

Much of the theoretical debate has focussed on the effects of trade on developed country wages. Economic theory has offered several competing theories on this link. These include the 'Heckscher-Ohlin', 'Stolper-Samuelson', and '"Factor-price equalisation' models. The Heckscher-Ohlin model of international trade and the Stolper-Samuelson theorem on protection and real wages came to prominence in the 1940s whilst the "factor price" equalisation model has been revived in recent debates, particularly in the arguments between Adrian Wood and others on the impact of international trade on the wages of 'first-world' unskilled workers.

The debate is basically about whether trade is a 'large' or 'small' factor in the decline of the wages of the unskilled relative to the skilled in 'first-world' economies.

A summary of the studies is provided in the attachment [Attachment 2].

This debate between 'large effects' and 'small effects' has been extended to other issues. For instance, Richard Freeman is sceptical about trade being the main culprit in the plight of unskilled workers. Freeman (1995) sees other forces at play such as technological advances or political events (such as the reunification of Germany and its effect on German labour markets). Whilst noting Woods' distinction between past and future trade liberalisation, and modestly noting that "Economists do not have a good record as soothsayers", Freeman is not convinced that future liberalisation will hurt unskilled workers in developed countries.

He notes that domestic labour market conditions play an important role. For instance, nurses, teachers, retail workers and other in service industries all have their pay determined by domestic (not global) conditions. Accordingly, Freeman is sceptical that trade agreements (such as NAFTA, or the EU arrangements) will have a large effect on wages and employment as he notes:

"Wildly heralded trade agreements such as the US-Canadian Agreement, the Common Market, and NAFTA have not dominated our wages and employment in the way their advocates or opponents forecast."

[Freeman (1995), pp.31-32]

From a non free market neo-classical perspective, Ajit Singh points out the flaws in the Wood analysis in setting up a "North-South" division between the developed and developing world.

Singh (1997) believes in a pro-growth strategy in the industrialised world to assist developing world trade. He rejects the post-1980 labour market flexibility doctrine as the policy solution to the labour market problems of both the developed and developing economies which he argues is implicit in the economic models of both sides of the trade and wages debate.

This is also the argument of James K. Galbraith (1996) who disagree with conventional economists attempts to cause division between the "north and south" of the global economy.

Notably, all the neo-classical economists do not advocate trade protection, even if they do believe that trade hurts unskilled workers. Wood, for instance supports employment subsidies to assist unskilled workers in the industrialised world rather than trade tariffs or subsidies.

Belman and Lee of the Economic Policy Institute (EPI) in Washington DC, in their survey, have concentrated on the trade effects on employment.

In terms of US manufacturing employment, Belman and Lee noted three effects:

  • First, the major impact on US manufacturing employment rather than wages in the last two decades.

  • Second, the greater impact that trade had in the 1970s and 1980s (and presumably the 1990s).

  • Third, the important role of intersectoral labour mobility, where workers may lose jobs in manufacturing but be employed in the service sector (typically at lower wages).

The authors also note the spillover effects of the "loss of wage leadership"' from the manufacturing sector which may also be a source of poor wage performance throughout the US economy. This, however does not consider other reasons for real wage deterioration - such as the erosion of US labour market institutions.

This is where the difference between US and Australian labour market institutions is important. Our stronger unions and stronger wage fixing institutions are especially important in the face of large changes in trade volumes.

Much of the literature focus just on trade flows, however, the OECD (1997) has surveyed the trade and 'other' effects including the role of technology in the globalisation process. The OECD notes several globalisation effects.

1. The substitution of labour for capital and technology in industrialised countries (which helps skilled workers but not the unskilled).

2. The effect of 'outsourcing' to low wage countries.

3. Re-location of firms from high wage to low wage countries.

This approach by the OECD, takes into account the broader effects of the globalisation, not just the effect of trade prices on labour markets. The OECD survey finds it difficult to distinguish between the effects of trade from technology on the labour market but still notes that the majority of the studies surveyed conclude that " has played a small role in labour market outcomes, especially shifts in relative employment and wages for unskilled labour in OECD countries." [OECD (1997) p.113].

Notably, one study mentioned by the OECD [Machin, Ryan, and VanReenan] noted the importance of labour market institutions in lessening the impact of trade on workers. The study notes:

"No impact of industry import and export intensities is found, but labour market institutions seem to play an important role: in the UK and the US, industries with higher unionisation levels experienced less downgrading of the relative wages and employment of unskilled workers." [OECD (1997), p.116]

This shows why workers gain from being a union member, especially in the face of increased trade liberalisation.

In conclusion, we can only say that the evidence on trade and labour markets is mixed. A major problem is that the globalisation advocates have been narrow in their focus and have asserted that trade liberalisation will ultimately benefit workers and the community but have rarely shown how. On the OECD's own admission, distributional issues have not been at the forefront of the analysis. Of those who do admit that there are winners and losers from trade liberalisation most are not sure how to 'compensate' the losers. Furthermore, some globalisation advocates, in domestic economic debates, are attacking the very social protections that are designed to assist the losers (eg the Industry Commission). This has caused a crisis for the trade liberalisation advocates who are trying desperately to re-package their public relations message (eg see DFAT's "Trade Liberalisation: Opportunities for Australia" leaflet).

Alternatively, those opposing globalisation have not always identified whether it is globalisation or other phenomena that are causing workers and the community harm. Furthermore, many globalisation sceptics are unable to show why the "closed economy" counterfactual would have been more beneficial.

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