World Economic Outlook

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World Economic Outlook April 2007
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• Chapter V
• The Globalization of Labor
• Prepared by
• Florence Jaumotte and Irina Tytell

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Motivations of the Chapter

• National labor markets around the world have
  become more integrated
• Integration of China, India, and the former
  Eastern bloc into the world trading system
• Progressive removal of restrictions on
  cross-border trade and capital flows
• Technological progress, especially in information
  and communications technology (ICT)
• This has led to the question of whether workers
  in advanced countries have been adversely
  affected.
• This question matters because of the risk of
  backlash against globalization in advanced
  countries.

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Objectives of the Chapter

• Estimate the size of the global labor supply and
  channels of access.
• Measure the effect of labor globalization on
  workers in advanced economies
• Overall labor income share
• Labor share in skilled and unskilled sectors
• Provide some policy recommendations to ease costs
  of adjustment to globalization.

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Size of the global labor supply and channels of
access
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The effective global labor supply has quadrupled
since 1980(Index, 1980 100)
Global Labor supply
Export-Weighted Labor Force by Region1
1National labor forces scaled by export-to-GDP
ratios.
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One main channel of access is through trade
Manufacturing Imports of Advanced OECD Economies
by Source (percent of total)
Manufacturing Exports of Advanced OECD Economies
by Destination (percent of total)
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Relative trade prices have been falling,
reflecting growing international competition
Advanced Economies Trade Prices (relative to
absorption price index, 2000 100)
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Imports of intermediates have been on the rise
but remain limited in the overall economy
Offshore Outsourcing (percent of gross output)
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Imported intermediates are more prevalent in
manufacturing than in services
Offshoring of Manufacturing Inputs by the
Manufacturing Sector (weighted percent of
manufacturing gross output)
Offshoring of Services Inputs (weighted percent
of gross output)
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Immigration has also risen in several countries
but is small relative to trade in most countries
Immigration (stock of foreign labor force in
percent of total labor force)
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How has the globalization of labor affected
workers in advanced economies?
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Labor compensation grew robustly in both advanced
and emerging countries
Emerging Asia Manufacturing Wages (percent of
U.S. constant PPP)
Advanced Economies Labor Compensation (index,
1980 100 weighted)
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But the share of income accruing to labor has
declined, especially in Europe and Japan
Advanced Economies Income Share of Labor by
Country Groups (percent of GDP)
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This is only partly a reversal of the rise in the
income share of labor from the 1970s
Income Share of Labor in G-7 Economies (percent
of GDP weighted)
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Has labor globalization caused the decline in the
labor income share? What theory says

• Emerging and developing countries have a
  comparative advantage in labor-intensive
  (especially unskilled labor-intensive) activities
• Hence increased trade integration of these
  countries will exert downward pressure on wages
  (corrected for productivity) of workers in
  advanced countries.

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But other significant developments may also have
affected labor markets, especially rapid
technological progress in ICT
ICT Capital (percent of total capital)
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and labor market reforms, such as changes in
the tax wedge and unemployment benefits
Tax Wedge (percent of labor cost)
Average Replacement Rate for Unemployment
Benefits (percent of income)
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Link between labor globalization and labor income
share Empirical methodology

• Labor share equation (Kohli, 1991 Harrigan,
  1998), derived from a translog revenue function
  with
• fixed factor quantities (capital-to-labor ratio)
• exogenous product prices (import and export
  prices, scaled by domestic absorption prices)
• shift factors of the production function
  (Feenstra, 2004), including offshoring intensity,
  immigration share, technological progress, and
  labor market indicators
• Panel of 18 advanced OECD countries, 1982-2002
  (or longest available sub-sample) country fixed
  effects instruments for variables related to
  globalization

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The labor share equation

• where
• PE, PM, and PA are prices of exports, imports,
  and absorption, L is labor K is capital
• X is the intensity of offshoring LM is immigrant
  employment KICT is ICT capital, and LMP are
  labor market policies

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Conclusion 1 Labor globalization was only one
factor contributing to declining labor shares and
technology had a bigger impact(Advanced
economies annual percentage points)
Decomposing Changes in the Labor Share
Decomposing the Contribution of Labor
Globalization
Contribution of labor globalization
Change in the labor share
Contribution of technological change
Contribution of trade prices
Contribution of labor globalization
Contribution of offshoring
Contribution of labor market policies
Contribution of immigration share
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Conclusion 2 The smaller decline in the labor
share of Anglo-Saxon countries resulted from
workers adjustment to ICT and labor market
reforms
Decomposing Changes in the Labor Share (annual
percentage points)
Change in the labor share
Contribution of technological change
Contribution of labor globalization
Contribution of labor market policies
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Have workers in skilled and unskilled sectors
been affected differently?
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Total labor compensation has been sluggish in
unskilled sectors
Advanced Economies Real Total Labor
Compensation (index 1980 100 weighted)
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Reflecting slow growth in compensation per worker
in the United States and falling employment in
Europe and Japan (Index, 1980 100)
Unskilled Employment
Unskilled Real Labor Compensation Per Worker
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While the income share of labor in skilled
sectors has risen, the income share of labor in
unskilled sectors has declined
Income Share of Labor in Skilled Sectors (percent
of economy-wide value added)
Income Share of Labor in Unskilled Sectors
(percent of economy-wide value added)
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Technology was the main factor behind the decline
in the income share of labor in unskilled
sectors(Annual percentage points)
Decomposing Changes in the Labor Share in Skilled
Sectors
Decomposing Changes in the Labor Share in
Unskilled Sectors
Change in the labor share
Change in the labor share
Contribution of technological change
Contribution of technological change
Contribution of labor globalization
Contribution of labor globalization
Contribution of labor market policies
Contribution of labor market policies
Contribution of employment shifts to skilled
sectors
Contribution of employment shifts away from
unskilled sectors
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The rise in offshoring in advanced economies has
been driven mostly by imports of skilled rather
than unskilled inputs
Offshoring of Unskilled and Skilled
Inputs (weighted percent of gross output)
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Most of the increase in immigrant labor force had
at least secondary education
Change in the Share of Foreign-Born Labor Force
in Total Labor Force by Skill Level, 19902000
(Percentage points)
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Policy conclusions
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How to ease the costs of adjustment to
globalization and technological progress?

• Facilitate the shift of workers from declining to
  expanding sectors
• Provide retraining when needed
• Ensure that unemployment benefit replacement
  rates do not deter workers from seeking
  employment
• Keep severance costs moderate
• Lower the cost of labor to business by reducing
  the tax wedge between payroll cost and net
  take-home pay

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Easing the costs of adjustment (continued)

• Improve access to education
• Ensure adequate social protection for workers
  during the adjustment period, including (for some
  countries) by
• Making health care less dependent on continued
  employment
• Increasing the portability of pension benefits.

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Thank You