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Economic Trends

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05.03.07

International Markets

Do Workers Benefit from Globalization?

Over the past 50 years or so, advances in transportation and communications, together with a loosening of government barriers to trade and financial flows, have greatly expanded the possibilities for international commerce. While countries that embrace globalization can improve their overall standards of living, not all of their citizens may share in the bounty. Rudimentary economic models suggest that when highly developed countries open up their economies to developing countries, whether through trade, the location of production, or immigration, unskilled workers in the advanced economies can find themselves worse off, if not in terms of their absolute purchasing power, then relative to their more highly skilled colleagues. Even highly skilled workers, however, can find themselves with a shrinking share of national income, leaving business owners with the lion’s share.

The International Monetary Fund (IMF) recently looked at the evidence bearing on this controversial subject and concluded that globalization has generally given workers in advanced developed countries a bigger piece, but a small share, of a growing economic pie. Unskilled workers bear the brunt of the globalization burden, as theory suggests. Over the past 25 years, the share of income going to skilled workers in most advanced economies has increased, but the share of income going to unskilled workers has declined.

The real earnings of unskilled workers in most advanced economies have continued to grow; they are receiving a bigger piece of the economic pie. Their earnings are not growing as fast as those of their skilled counterparts, however. In the United States, the gap between the real earnings of skilled and unskilled workers has widened by approximately 25 percent, according to IMF estimates. Two factors determine the real earnings of workers: employment and real compensation per worker. The employment of unskilled workers in the United States has expanded, but more slowly than the employment of skilled workers. Real compensation per unskilled worker in the United States, however, fell until fairly recently and has since made only meager gains. The situation is somewhat different in most other advanced economies, where real compensation per unskilled worker has risen almost as much as that of their skilled counterparts, but their employment prospects have been rather dismal.

Globalization is not the only force behind these labor patterns. Technological change and governmental policies can also have a big impact on labor's overall share of income and on the portions of income going to the skilled and unskilled sectors. Of course, all of these factors are inter-related. Isolating the individual impact of any particular one is a tricky task, so one should always interpret such attempts cautiously.

The IMF staff estimates that while globalization and technological change both adversely affected the share of income going to unskilled workers, technological change had the bigger impact. This is not all that surprising because business investments associated with advances in information and communication technology often substitute for unskilled labor, while enhancing the productivity of their skilled counterparts. Even though the share of income going to skilled workers rose over the past 25 years, globalization held it back. This probably reflects the influence of offshoring. Firms in advanced economies often outsource the production of intermediate inputs and services that then fit into a more highly skilled production process. The manufacture of these offshored intermediate goods and services frequently involves a higher skill set than the fabrication of imported final goods. Consequently, offshoring tends to affect the income share of workers higher up on the skill spectrum than do final goods imports. In any event, offshoring remains a small part of the overall production in advanced economies.

The IMF study presents a quandary to the antiglobalization crowd. Should society care about the absolute well-being of workers, which globalization enhances, or should it worry about their relative well-being? If it is the latter, do you want to stop technological changes as well?



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