EFFECTS OF GLOBALIZATION ON LABOR MARKET
Published Sept. 12, 2019, 11:33 a.m. by Moderator
Sociologist Anthony Giddens defines globalization as “a decoupling of space and time, emphasizing that, with instantaneous communications, knowledge and culture can be shared around the world simultaneously.” Globalization refers to economic globalization through , , capital flows, , and the spread of technology.
Labor markets around the world have become more integrated and interconnected. The progressive elimination of border restrictions on trade and capital flows and the development of technology has made it possible for manufacturing processes to be outsourced and located farther from their intended markets. The location of production has been relative to labor costs across countries. There has been an increase of migrant workers through legal and illegal channels across borders.
The demand for more skilled workers has increased at the expense of less-skilled workers in the advanced economies, and the income gap between the two groups continues to grow widening the income inequality. Globalization has coincided with higher unemployment among the less skilled. This essay examines the effects of increased globalization on advanced and developing economies. There is a common belief that globalization has had adverse impact on the interests of workers, especially unskilled workers, either directly through immigration or indirectly through trade and capital mobility.
Globalization is bringing about greater specialization and higher productivity, affordable goods and services, quicker dispersion of new and better innovations. Despite all these, there is growing concern among stakeholders and world citizens that the current form globalization is not tenable.
An important trend in labor markets in the advanced economies has been a steady shift in demand away from the less skilled toward the more skilled. This trend has created a sharp increase in wage and income inequality between the less and more skilled in some countries. Countries that recorded less wage inequality experienced in its place higher rates of unemployment for the less-skilled workers (Matthew J. Slaughter).
In decentralized labor markets such as the United States and the United Kingdom, with more flexible wage structures, the decline in demand for less-skilled labor has translated into lower wages. In contrast, in countries with centralized labor markets, such as France, Germany, and Italy, it has meant lower relative employment.
Income gaps have widened in a number of developing countries as well as in the advanced economies. Evidence suggests that labor demand in developing countries has also shifted toward workers with high skill levels relative to the average. For example, research shows in the mid-to-late 1980s, trade liberalization in Mexico led to increased relative wages of high-skilled workers (Matthew J. Slaughter; Palma).
International trade affects the prices of exports and imports, which influences the cost of labor within countries, which in turn affects the demand for labor. Competitions from imports affect the pricing and hurt firms’ profit margins. The firms will shift to the more profitable ventures giving rise to demand for labor in the newly profitable area and reduced labor demand in the unprofitable area. International trade affects wages; if industries become more competitive worldwide, this will result in both lower wages and smaller wage differences across countries.
If the supply of labor remains unchanged, the increased demand leads to a rise in wages, the workers will demand better pay from the industries that are more profitable. Import competition lowers the cost of products made by low-skilled labor relative to the cost of products made by skilled labor; firms will concentrate on skill intensive manufacturing to be profitable (Matthew J. Slaughter).
Globalization has affected the makeup of the labor force in many countries by promoting a shift of lower-skilled, labor-intensive production processes to emerging markets and encouraging the growth of higher-skilled, knowledge-based production in industrialized countries.
Studies have shown, for the advanced economies as a whole, trade with developing countries has led to about a 20 percent decline in the demand for labor in manufacturing, with the decline concentrated among unskilled workers. Moreover, this is because the advanced economies have reduced their tariffs but replaced them with nontariff barriers and upgraded their products to higher competitive brands (Matthew J. Slaughter).
Trade integration reduces the need for capital to flow from capital- abundant to capital-scarce countries. There is less reason for capital to flow towards countries experiencing a labor force or productivity boom. The volume of capital flows across borders has grown at a rate much higher than that of international trade in products. Outflows of capital from advanced economies have lowered wages. The multinational firms can establish overseas affiliates, to outsource jobs to a cheaper more affordable location.
Immigration trends also affect wages. In the advanced economies, immigration of less-skilled workers from the developing countries dips the earnings of less-skilled natives as the immigrants ‘clock’ more and cost less. Immigration can also lead to increased growth, particularly if, as in the case of Israel, immigration led to increased investment and higher wages and output.
Technology increases productivity leading to a rise in wages. As technology and production techniques become more widely available, the wages tend to stabilize and equalize. Trade increases innovation and the spread of technology, and thus indirectly affect wages. Higher foreign investment in a particular industry is usually associated with higher wages in that industry (Matthew J. Slaughter).
Globalization produces winners and losers; the loss of jobs among the less skilled in the advanced economies and the creation of more skilled jobs. Policymakers must be vigilant about potential dislocations and set up systems to mitigate and to ensure that no group is marginalized.
The benefits of globalization should be maximized and widely shared by making sure that policies do not upset market-based regulations, but promote flexibility in markets mainly the labor markets. Maximize the ability of workers to relocate if they wish, maintain appropriate social safety nets that encourage employment, and focusing on lifelong learning and training. The government should also put emphasis on domestic integration.
Matthew J. Slaughter, Phillip Swagel. Does Globalization Lower Wages. Economics Series 11. International Monetary Fund. Washington D.C: IMF Publication Services, 1997.
Palma, Gabriel. Trade liberalization in Mexico: Its impact on growth, employment and wages. EMPLOYMENT PAPER. International Labor Organization. Geneva: ILO, 2003.
Jan Theron, Shane Godfrey and Margareet Visser. Globalization, the impact of trade liberalization, and labour law: The case of South Africa,. ESSAY PAPER. Cape Town: University of Cape Town, 2007.