Over the past two decades, labor markets around the world have become increasingly integrated
. Political changes and economic reforms have transformed China, India, and the former Eastern bloc countries, effectively involving their large labor forces in open market economies. At the same time, the development of technology, combined with the progressive removal of restrictions on cross-border trade and capital flows, has made it possible for production processes to be unbundled and located farther from target markets for a growing universe of goods and services. The location of production has become much more responsive to relative labor costs across countries. There have also been increasing flows of migrants across borders, through both legal and informal routes.
This ongoing globalization of the labor market has drawn increasing attention from policymakers and the media, particularly in the advanced economies. The most asked question is whether the addition of this unprecedentedly
large pool of labor from emerging market and developing countries is adversely affecting compensation and employment in the advanced economies.
This article addresses this important and emotive question. In contrast with most previous studies, which focus on one country or a single channel of transmission, it takes a broad approach, considering a large sample of advanced economies and a full range of transmission channels (competing imports of final products, off-shoring of intermediate products, and immigration). The chapter focuses on the following issues: How rapidly has the global labor supply grown, and which channels of labor globalization have been most important?.To what extent can recent trends in labor
shares and labor compensation in advanced economies be explained by the changing global labor supply relative to other factors such as technological change and labor market reform? Has the impact been different in skilled and unskilled sectors?, What policies can help the advanced economies meet the challenges of further labor market globalization?.
This article finds that the effective global labor force has risen fourfold over the past two decades. This growing pool of global labor is being accessed by advanced economies through various channels, including imports of final goods, off-shoring of the production of intermediates, and immigration. The ongoing globalization of labor has contributed to rising labor compensation in advanced economies by boosting productivity and output, while emerging market countries have also benefited from rising wages. Nevertheless, globalization is one of several factors that have acted to reduce the share of income accruing to labor in advanced economies, although rapid technological change has had a bigger impact, especially on workers in unskilled sectors. The analysis finds that countries that have enacted reforms to lower the cost of labor to business and improve labor market flexibility have generally experienced a smaller decline in the labor income share.
Looking ahead, it is important for countries to maximize the benefits from labor globalization and technological change, while also working to address the distributional impact. To this end, policies should seek to improve the functioning of labor markets; strengthen access to education and training; and ensure adequate social safety nets that cushion the impact on those adversely affected, without obstructing the process of adjustment.
A first question to address is how the opening up of China, India, and the former Eastern bloc countries, together with ongoing demographic developments, has affected the global labor supply. This is not easy to answer because much depends on the assumptions made about how much of a country’s labor force is in, or could potentially compete in, the global market. One simple approach is to weigh each country’s labor force by its export-to-GDP ratio. By this measure, the effective global labor supply quadrupled between 1980 and 2005, with most of the increase taking place after . East Asia contributed about half of the increase, due to a marked rise in working age population and rising trade openness, while South Asia and the former Eastern bloc countries accounted for smaller increases. While most of the absolute increase in the global labor supply consisted of less-educated workers (defined as those without higher education), the relative supply of workers with higher education increased by about 50 percent over the last 25 years, owing mostly to advanced economies, but also to China.
Advanced economies can access this increased pool of global labor both through imports of goods and services and through immigration. Trade has been the more important channel immigration remains highly restricted in most countries . A similar picture emerges for developing and emerging market countries, where the export-to-GDP ratio is in general much higher than the ratio of emigrants to the domestic labor force. Nevertheless, immigration has expanded significantly over the past two decades in some large European economies (Germany, Italy, and the United Kingdom) and in the United States. The share of immigrants in the U.S. labor force is now close to 15 percent and hence comparable to the share of imports in GDP. Elsewhere the share of immigrants is still substantially less than the share of imports in GDP, but it is not negligible. and has grown more rapidly, not least because immigration remains highly restricted in most countries . A similar picture emerges for developing and emerging market countries, where the export-to-GDP ratio is in general much higher than the ratio of emigrants to the domestic labor force. Nevertheless, immigration has expanded significantly over the past two decades in some large European economies (Germany, Italy, and the United Kingdom) and in the United States. The share of immigrants in the U.S. labor force is now close to 15 percent and hence comparable to the share of imports in GDP. Elsewhere the share of immigrants is still substantially less than the share of imports in GDP, but it is not negligible.
Focusing on trade, the share of developing country products in the manufacturing imports of advanced economies has doubled since the early 1990s . This owes much to China. Developing countries have also been capturing an increasing share of world markets. At the aggregate level, however, trade is a win-win game. As China, India, and the Eastern bloc countries have opened up, world markets and opportunities to export have expanded considerably for advanced economies and developing countries alike. Developing countries’ imports have been growing faster than those of advanced economies and the share of advanced economies’ exports going to developing countries has been rising (though not as rapidly as the share of developing countries in their own imports). Further, while both import and export prices have been on a declining trend relative to output prices, the terms of trade of advanced economies have improved by a cumulative 7 percent since 1980. Most notably, there was a substantial improvement in the terms of trade of Japan in the first half of the 1980s. However, the large fall in import prices at this time was mainly the result of the strong appreciation of the yen at a time when oil prices were falling, and was not directly related to globalization.